A.S. v. Comm.

The tax deficiency arose from a dispute over the date Schaer completed the purchase of the stock of Tampa-based Computer Management Consultants in March 2005. The company incurred expenses of $1.1 million which it wrote off after March 10, 2005 but before March 20, 2005. Schaer signed the purchase agreement for the company’s stock on March 10, 2005 but the seller maintained that the sale was not completed until March 20, 2005. The seller claimed the company’s expenses on its tax return. However, on March 10, 2005, in an effort to avoid double taxation, Schaer filed a Subchapter S election to permit Computer Management Consultant’s income and losses to flow to his personal tax return. Shaer reported a small loss from the company on his tax return because he also claimed the company’s expenses from March.

After conducting an audit, the IRS determined that the sale of the stock took place on March 20, 2005 and disallowed Schaer’s deduction of the expenses on his personal tax return. This caused Computer Management Consultants to have a large profit for the portion of 2005 when Shaer owned the company. As a result the IRS asserted that Schaer grossly under reported the income from the company on his personal return. The IRS assessed Schaer with $525,665 in taxes and $105,133 in penalties. Counselor for Schaer successfully argued that the determination by the IRS that the sale of the stock took place on March 20, 2005 made the Subchapter S election filed by Schaer invalid since he was not a shareholder on March 10, 2005 when the election was made. A Subchapter S election must be made by the shareholders of the company. As a result, no part of the income of the company should flow to Schaer’s return.

On the eve of trial the IRS conceded. The Tax Court entered its decision in favor of Schaer, who owed only $7,165 arising from an unrelated error on his return.