Federal Income Tax Update: Part 2

By Keith A. Wood

This is the second of two installments of this article. The first installment was posted on the Tax Section blog on Jan. 16, 2017.

I. Hobby Losses: Horse Breeder Had For-Profit Activity.

The 7th Circuit Court of Appeals reversed the Tax Court and held Mr. Roberts engaged in his horse training activity “for profit.”  Roberts v. Commissioner, 117 AFTR 2d 2016-629. The IRS disallowed certain horse breeding activity losses for 2005 through 2008. In reviewing all of the relevant facts, the Tax Court determined although Mr. Roberts did not engage in the activity for profit during the first two years, he was engaged in horse related activities for profit under Section 183 for the last two tax years.

A. Background. Mr. Roberts owned a number of night clubs, restaurants and bars that he successfully operated. In 1987, Mr. Roberts purchased a 50-acre parcel of land that he rented to a farmer for about 10 years. In 1997, Mr. Roberts bought an additional 45-acre tract of land (the “Morris Street Property”) directly north of the 50-acre tract. Mr. Roberts believed although he could only earn a small amount of income from this farm property, he could capitalize on the land investment by creating a 95-acre continuous plot through future appreciation.

In the late 1990s, Mr. Roberts became interested in breeding and training race horses. By 2005, Mr. Roberts decided to build his own horse training facility on the Morris Street Property, but ran into opposition from the local city government. The actions of the city discouraged Mr. Roberts from building on the Morris Street Property, and he started looking for a new location to build a horse training facility. In 2005, an unrelated party offered to buy the 95-acre tract (which included the Morris Street Property) for around $2.2 million. In June 2006, Mr. Roberts closed on the sale and chose to recognize taxable gain on the 45-acre Morris Street Property parcel, but decided to reinvest the proceeds from the original 50-acre parcel through a Section 1031 exchange for other property that would be better suited for training horses. In 2006, Mr. Roberts purchased a 180-acre parcel of land near Mooresville, Indiana for $1 million. Within the next six months, he invested between $500,000 and $600,000 in building improvements for a horse training facility. In 2007 and 2008, Mr. Roberts became more heavily involved in his horse training activities.

B. Tax Court Decision. In 2005 through 2008, Mr. Roberts was involved in multiple aspects of the race horse industry, including boarding, training and raising horses. Mr. Roberts had net losses from these activities for all four years at issue. Applying the nine-factor test under Reg. 1.183-2(b), the court found that Mr. Roberts was not engaged in the horse activity for profit during 2005 and 2006, but he had established that he had engaged in these activities for profit in 2007 and 2008, notwithstanding continued losses in those years.

Although Mr. Roberts employed a “rudimentary record keeping system” and had a history of losses in all these years, other factors indicated his for profit objective. For example, he sold his former unsuitable facility and moved his operations to a new property, expending substantial sums to build a premier training facility. In addition, over time, he hired assistants and adopted accounting methods that allowed him to make informed business decisions. He consulted with experts as to how he could make his business more profitable and spent substantial time and effort in his horse breeding and training activities. Mr. Roberts was also very active in various horse related trade associations and had risen through the ranks to leadership roles at two professional horse racing associations. Further, Mr. Roberts had been successful in most of his prior business endeavors.

Based on the facts, Mr. Roberts was able to show he engaged in the horse related activities for profit in 2007 and 2008, but not in 2005 and 2006. Mr. Roberts had argued, notwithstanding his losses in 2005 and 2006, the court should consider that an overall profit was achieved in 2005 and 2006 by virtue of the sale of the Morris Street Property in 2006. The court noted where land is purchased or held primarily with the intent to profit from its appreciation in value and where the taxpayer also engages in another activity on the land, the activity and the holding of the land will ordinarily be considered a single activity, but only if the income derived from the activity exceeds the deductions attributable to that activity which are not directly attributable to holding land. In other words, when a taxpayer buys land mainly to profit from its appreciation, the potential appreciation of land is relevant in a Section 183 analysis only if the activity generates income in excess of deductions for the activity. On the other hand, when a taxpayer’s primary intent is not to profit from the land, the appreciation of the land is considered in a Section 183 profit analysis. Perry v. Commissioner, TC Memo 1997-4017.

Mr. Roberts’ primary intent in purchasing the Morris Street Property was to gain from its appreciation. Therefore, holding the Morris Street Property was an activity separate from his horse related activities and therefore any expectation of appreciation of that real estate would not contribute to finding he was engaged in those activities for profit. Therefore, that Mr. Roberts sold the Morris Street Property for gain did not help him establish a for profit motive for his horse activities in 2005 and 2006. For 2007 and 2008, however, Mr. Roberts had purchased the Mooresville Property specifically to breed and train horses on that property. Therefore, the Mooresville Property’s expected appreciation in value would be relevant to determining whether Mr. Roberts carried on his horse related activities with a for profit intent under Section 183 in 2007 and 2008.

For 2005 and 2006, Mr. Roberts’ horse activities were primarily of a recreational and social nature. However, for 2007 and 2008, Mr. Roberts became more heavily involved in the activities with less emphasis on the recreational and social aspects.

Based upon all of the facts, the Tax Court concluded Mr. Roberts had established a for profit objective for 2007 and 2008, but not for 2005 and 2006. In essence, the court somewhat “split the baby” and allowed the deductions for losses for two out of four years. Also see Annuzzi v. Comm’r, TC Memo 2014-233, where the Tax Court concluded the taxpayer had a for profit motive notwithstanding a 30-year history of losses.

C. Court of Appeals Reverses the Tax Court. On appeal, the 7th Circuit held Mr. Roberts had engaged in his horse training activity for profit for all four years under audit. First, the court took objection to the Tax Court’s split the baby approach and stated that concluding a business began as a hobby but then turns into a for profit business only after it becomes profitable would mean essentially any start-up company would not be able to deduct its start-up costs. Moreover, the court believed that, even in 2005 and 2006, Mr. Roberts operated his horse racing enterprise as a business. Finally, the court held the Tax Court placed too much emphasis on Mr. Roberts’ enjoying his activities, citing Jackson v. Commissioner, 59 TC 312, 317 (1972), in which the Jackson court stated “success in business is largely obtained by pleasurable interest therein.”

II. Taxpayer, Qualifying as a Real Estate Professional, Still Must Prove Material Participation: Gragg vs. U.S. 118 AFTR 2d 2016-5091.

In Gragg, the 9th Circuit Court of Appeals affirmed that merely qualifying as a real estate professional, under Section 469(c)(7), does not automatically make the taxpayer’s rental losses deductible. The court confirmed even real estate professionals must prove their material participation, which cannot be proven by offering only non-contemporaneous ballpark guesstimates of time spent on various activities.

III. Real Estate Professional Proved Material Participation: Hailstock, TC Memo 2016-146.

Ms. Hailstock quit her full-time job and began purchasing real estate. For the years at issue, she owned rental properties at over thirty different locations and did not have a job outside of her real estate activities. She claimed she spent over forty hours per week on her real estate activities, which included purchasing supplies, supervising real estate repairs, and meeting with prospective tenants.

Ms. Hailstock did not keep regular and contemporaneous records of time spent in her real estate activities. Likewise, she kept poor records of her income and expenses related to the activities. The tax court allowed the IRS to use the bank deposit analysis method to reconstruct Ms. Hailstock’s taxable income from her rental properties. Notwithstanding her lack of contemporaneous time logs, the court found her testimony credible that she, in essence, was a one-man operation, and spent at least forty hours per week on her real estate activities. The court noted, by virtue of the IRS’s bank deposit analysis reconstruction, it was clear Ms. Hailstock had significant income and significant expenses associated with her real estate operations. Therefore, she met her burden of proving material participation.

IV. S Corporation Payments of Owner’s Personal Expenses are Treated as Loan Repayments and Not as Taxable Compensation: Scott Singer Installations, Inc., TC Memo 2016-161.

From 2006 to 2008, Mr. Singer advanced over $600,000 to his S corporation to fund new business expansions. The corporation incurred business difficulties from 2009 to 2011, and Mr. Singer personally borrowed over $500,000 that he loaned to it. The corporation reported operating losses of over $100,000 for 2010 and over $250,000 for 2011. During these two years, the corporation paid over $182,000 of Mr. Singer’s personal expenses by making payments directly to Mr. Singer’s personal creditors. On audit, the IRS took the position that when the corporation paid these funds to Mr. Singer’s creditors, the payments should be treated as wage payments to Mr. Singer that are subject to self-employment taxes rather than nontaxable repayments of Mr. Singer’s loan to his corporation.

The corporation consistently reported all of Mr. Singer’s advances as shareholder loans on the corporation’s general ledgers and tax returns. However, there were no promissory notes between Mr. Singer and the corporation. Also, Mr. Singer never charged any interest to the corporation, and there were no maturity dates imposed on the loans. The corporation, however, did not claim any business deductions for the amounts paid to Mr. Singer’s personal creditors and, instead, treated the payments as partial repayments of Mr. Singer’s loans to the corporation.

The IRS took the position Mr. Singer was an employee of the corporation for 2010 and 2011, and therefore contended the payment of over $180,000 of personal expenses should have been treated as taxable wages to Mr. Singer that were subject to employment taxes. The court, however, agreed with Mr. Singer notwithstanding the absence of any loan documentation. The court ruled the principal factor in evaluating the nature of transfers to closely-held corporations is whether there was a genuine intention to create a debt with a reasonable expectation the debt would be repaid.

The court noted several factors that indicated Mr. Singer intended to establish a debtor-creditor relationship with his corporation. The corporation always reported Mr. Singer’s advances as loans on its general ledgers and tax returns, and the corporation’s balance sheets showed the advances as loans. The corporation always treated its payment of Mr. Singer’s personal debts as loan repayments and not as deductible business expenses. Also, the amounts paid to Mr. Singer’s personal creditors each year were consistent, regardless of the value of services he actually rendered to the corporation during those years. Many of the payments were for Mr. Singer’s recurring and fixed monthly expenses, such as home mortgage payments and vehicle loan repayments. These payments being consistent in amount and made on a regular basis indicated the payments were more in the nature of debt repayments rather than compensation for services.

Not all of Mr. Singer’s advances to the corporation, however, were treated as loans. The court noted Mr. Singer had a resonable expectation of repayment of loans when he made advances during 2006 and 2008 because, at that time, the business was well known and successful. However, the court did not believe Mr. Singer had a reasonable expectation of repayment for the advancess made after 2008 because of the poor financial condition of the company at that time. Therefore, the court ruled advances made after 2008 were capital contributions and not loans.

V. Taxpayer Not Entitled to Unsubstantiated NOL Carryforwards from Closed Years: Jasperson vs. Commissioner, 118 AFTR 2d 2016-5633.

Mr. Jasperson formed an S corporation in 1998 that engaged in the business of liquidating video stores. Mr. Jasperson claimed his S corporation had losses in 2005 and 2006 that were passed through to him and that resulted in NOL carryforwards on his individual tax returns for 2008, 2009, and 2010. Mr. Jasperson claimed that, rather than carry his NOLs back two years, he had elected, pursuant to Section §172(b)(3) to waive the two-year period carry back option and instead to carry the losses forward.

In 2013 the IRS assessed additional tax for 2008 through 2010 on the grounds Mr. Jasperson could not document and verify the validity of his NOL carryforwards from 2005 and 2006. By the time the IRS assessed the tax deficiencies for 2008 to 2010, the statute of limitations was already closed as to Mr. Jasperson’s 2005 and 2006 tax returns. The 11th Circuit held that did not preclude the IRS from disallowing the NOL carryforwards in 2008 through 2010. Mr. Jasperson was not able to produce any records from 2005 to 2006 to verify the calculations of his NOLs for those years, resulting in the NOL carryforwards in 2008 through 2010 being disallowed. The court also affirmed the imposition of Section 6662 accuracy-related penalties. This case illustrates the importance of retaining NOL records through the 20-year carryforward period.

VI. IRS Permits Carry Forward of Increased §38 Credits from Closed Years.

In PLR 201548006, the taxpayer was a partner of a partnership and a shareholder in an S corporation. The partnership and the S corporation had understated the amount of their general business credit for several earlier years that were then closed. Nevertheless, the IRS held the taxpayer could use the corrected amount of the partnership’s and S corporation’s general business credit for the closed years to compute his general business carry forward to an open tax year.

VII. IRS Gets Summary Judgment Against President for Trust Fund Recovery Penalties.

In Arriondo vs. U.S., 118 AFTR 2d 2016-5205, Mr. Arriondo was the president and treasurer of American Steel Building Company, Inc. However, Mr. Arriondo was not an owner of the company. The company’s finance director ceased paying the company’s payroll taxes and deceived Mr. Arriondo about the payment of payroll taxes. When he learned the former finance director had failed to pay the company’s payroll taxes, Mr. Arriondo began shutting down the company and laying off employees. The company hired a bankruptcy attorney and filed for bankruptcy protection 18 days after Mr. Arriondo learned of the unpaid payroll taxes. During this 18-day period, however, Mr. Arriondo approved payments of other corporate expenses, including two payroll payments. The IRS assessed the trust fund recovery penalty against Mr. Arriondo.

Mr. Arriondo was an authorized check signer and had access to all of the company’s books and records. Mr. Arriondo was , therefore, clearly a responsible person. Also, although the company’s finance director deceived Mr. Arriondo about whether the company was making its payroll tax deposits, Mr. Arriondo knew the company was in trouble and had failed to pay other state taxes. Mr. Arriondo never took steps to make sure that IRS payroll taxes had been paid. The IRS contended this willfull disregard constituted willfull failure by Mr. Arriondo to make sure payroll taxes had been paid.

The court granted summary judgment in favor of the IRS that Mr. Arriondo was personally responsible for over $350,000 of back payroll taxes. Mr. Arriondo was clearly a responsible person. His failure to inquire about the payroll tax situation, when he knew about the poor financial condition of the company, constituted willful failure to make sure payroll taxes had been paid. Also, after Mr. Arriondo knew of the unpaid payroll taxes, he still allowed unencumbered funds to be used to pay other creditors ahead of the IRS, making Mr. Arriondo responsible for trust fund taxes for prior tax periods.

VIII. IRS is Successful in Pursuing Alter-Ego Theory on Successor Corporation: WRK Rareties, LLC v. US, 117 AFTR 2d 2016-856.

Mr. Kimpel was the sole owner, president and managing officer of Kimpel’s Jewelry and Gifts (“KJG”). KJG operated a jewelry store in Ohio. In 2005, KJG filed for bankruptcy protection and, during the bankruptcy proceeding, federal employment taxes went unpaid. KJG ceased operations in December 2010. In September 2010, Mr. Kimpel formed a new company, WRK Rareties, LLC doing business as “Kimpel’s Fine Diamonds” (“WRK”). WRK operated in the same jewelry store location previously operated by KJG. Mr. Kimpel continued as the sole owner, president and manager of the day-to-day operations of WRK. WRK continued to use the same assets that were formerly owned and used by KJG, including signage, furniture, and fixtures. WRK continued to operate in the same type of business formerly operated by KJG. Moreover, WRK continued to employ the same employees as KJG. These employees retained the same titles and salaries they had when they worked for KJG.

The IRS sought to levy on the assets owned by WRK to satisfy the employment tax liabilities of KJG. Based upon the foregoing facts, the court had little trouble concluding WRK was an alter-ego of KJG and, therefore, the IRS levy action was proper. The court noted that under Ohio law, WRK’s paying no consideration to acquire the assets of KJG made the successor liable for the liabilities of the predecessor corporation.

IX. Sporadic Sale of Scrap Steel Did Not Amount to a Trade or Business: Ryther, TC Memo 2016-56.

Thomas Ryther owned a steel fabrication business that ultimately went through bankruptcy. At the conclusion of the bankruptcy proceeding, the bankruptcy trustee abandoned what it believed to be worthless property, including some scrap steel. Over the next several years, Mr. Ryther made sporadic sales of his scrap steel generating over $300,000. Mr. Ryther reported the sales proceeds as other income on his tax return. The IRS took the position the scrap steel sales constituted a trade or business that should be subject to self-employment tax. Section 1402(a)(3) provides any gain from the sale of a taxpayer’s own property does not constitute self-employment income unless (1) the property is inventory or (2) the property is held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business.

The court determined Mr. Ryther was not holding the scrap steel in the ordinary course of his business based upon the following factors:

  1. Frequency or Regularity of Sales. The sales of scrap steel were only made once or twice a month, so this factor favored Mr. Ryther.
  2. Substantiality of Sales. Although sales were sporadic in number, the revenue generated constituted all of Mr. Ryther’s income during the applicable years. However, there was very little effort on Mr. Ryther’s behalf to generate the revenue. The court found this factor as neutral.
  3. Length of Time the Property is Held by the Taxpayer. Mr. Ryther held the scrap metal for over seven years, so this factor favored Mr. Ryther.
  4. Segregation of Personal Property From Business Property. Since Mr. Ryther did not have personal scrap metal and business scrap metal, this factor was neutral.
  5. Purpose of Acquisition. The scrap metal was left after Mr. Ryther’s business closed, so this factor was neutral.
  6. Sales and Advertising Efforts. Mr. Ryther did not make any attempt to advertise the property for sale. However, since there was a ready market for scrap steel, this factor was neutral.
  7. Time and Effort Devoted to the Activity. Mr. Ryther contacted scrap wholesalers directly to arrange sales to third party buyers. However, the buyers did not approach Mr. Ryther as customers typically would. Thus, this factor was neutral.
  8. How the Sales Proceeds Were Used. This was perhaps the most important factor viewed by the court in Mr. Ryther’s favor. Mr. Ryther did not use any of the proceeds from the sales to acquire more scrap metal. Instead, he was merely liquidating the scrap to pay normal living expenses.

Based on the foregoing, the court held Mr. Ryther’s scrap steel was not held for customers in the ordinary course of Mr. Ryther’s trade or business. Therefore, no self-employment tax was owed on the gains.

X. Home Care Provider Meets the Section 530 Reasonable Basis Test for Treating Workers as Independent Contractors for Employment Tax Purposes: Nelly Home Care, LLC v. U.S. 117 AFTR 2d 2016-1500.

Nelly Home Care, Inc. (“NHC”) was formed and managed by Helen Carney, as a successor in interest to Nelly, LLC (“Nelly”). NHC provided non-medical home care services. Throughout its history, NHC contracted with workers to provide home care services to senior citizens. NHC represented itself as a matchmaker between elderly customers and workers who provided home care services. After a prospective customer contacted NHC requesting a home care worker, NHC reviewed workers in its work registry to determine if anyone was available. NHC took the position it neither trained nor supervised workers in their performance of duties.

Prior to forming NHC, Ms. Carney worked as a provider of home care services. While so working, Ms. Carney met other providers of in-home health care services and learned they worked as independent contractors. Ms. Carney also learned other home care service providers in her area treated their workers as independent contractors. Ms. Carney then decided to start her own company to provide home care services through independent contractors in the Bryn Mawr, Pennsylvania area.

The IRS audited the personal tax returns of Ms. Carney and her husband for 2004 and 2005. As part of the audit, the IRS requested information regarding Nelly, LLC (the predecessor to Nelly Home Care, Inc.). The requests included information relating to Forms 1099 and copies of independent contractor agreements for Nelly, LLC and its independent contractors. The IRS assessed additional taxes to Mr. and Ms. Carney after finding Ms. Carney had charged 80% of her personal expenses through Nelly, LLC. In 2011, the IRS conducted an employment tax audit of Nelly, LLC and Nelly Home Care, Inc. and determined its workers were employees and not independent contractors. Ms. Carney took the position she should be entitled to Section 530 safe harbor relief.

Section 530 of the Revenue Act of 1978 provides a safe harbor for taxpayers who are assessed back employment taxes for erroneously failing to classify certain workers as employees, rather than independent contractors, provided the taxpayer had a reasonable basis for not treating the workers as employees. Generally, a taxpayer can show it had a statutory reasonable basis not to classify its workers as employees if the taxpayer based this classification on reasonable reliance on one of the following:

  1. judicial precedent, published rulings or a letter ruling to the taxpayer (the “Judicial Precedent Defense”);
  2. a past IRS audit in which there was no assessment attributable to the treatment for employment tax purposes of the individuals as independent contractors (the “Prior Audit Defense”); or
  3. a long-standing recognized practice of a significant segment of the industry in which such individuals engage (the “Long Standing Industry Practice Defense”).

The Tax Court held Ms. Carney did not satisfy any of the three statutory safe harbor relief provisions. Although there was a prior IRS audit of the Carneys’ returns, the IRS reviewed Nelly’s business records in a prior audit only to determine that certain deductions and expenses claimed by the LLC should be nondeductible personal expenses of Ms. Carney. Therefore, Ms. Carney could not rely upon the Prior IRS Audit Defense.

The court also held Ms. Carney could not meet the Long Standing Industry Practice Defense because she could not prove a significant segment of the home health care industry treated its workers as independent contractors. Although Ms. Carney testified she had known other health care agencies that treated their workers as independent contractors, that did not establish a significant segment of an industry as a whole. Also, Ms. Carney did not provide any evidence this was a long-standing practice when she entered the industry.

Nevertheless, the court held although NHC and Nelly had not shown they were entitled to any statutory safe harbor relief under Section 530, NHC was entitled to relief under the common law other reasonable basis safe harbor. Prior to forming Nelly Home Care, Inc., Ms. Carney looked at other home health care agencies and found most of them treated their workers as independent contractors. The court found it significant that the IRS had said nothing in its prior audit about independent contractor classification. The court noted that during the audit of Ms. Carney’s personal tax returns, the IRS requested and reviewed numerous documents regarding Nelly, including copies of contracts with independent contractors. Given the IRS undertook an in-depth analysis of Nelly’s business practices, it was reasonable for Ms. Carney to interpret the IRS’ silence on the independent contractor classification issue as acquiescence.

Based upon all of the facts and circumstances, the court held the Carneys met the common law reasonable basis test under Section 530.

XI. Dissolved Corporation Cannot File Tax Court Petition: Allied Transportation, Inc., TC Memo 2016-102.

Allied Transport was formed in 2001 as a Maryland corporation. In 2004, the Maryland Department of Revenue revoked Allied’s corporate charter for failing to file a required tax return. In August 2014, the IRS mailed Allied a 90-day statutory notice of deficiency and, within the 90-day period, Allied filed a Tax Court petition to challenge the tax assessment. The Tax Court granted the IRS’ motion to dismiss the petition for lack of jurisdiction on the grounds Allied’s corporate charter had been revoked some ten years earlier.

Under the Maryland law, a corporation whose corporate charter has been revoked may not initiate a law suit unless the law suit is related to the winding up of the corporation’s activities. Here, the Tax Court petition was filed ten years after the company’s charter was revoked. The court, therefore, ruled the petition must be dismissed since the petition was not initiated in connection with the winding up of the corporation’s activities. See also Urgent Care Nurses Registry, Inc., TC Memo 2016-198.

XII. Single Member LLC is Taxed as a Disregarded Entity even after it Files Form 1120: Heber E. Costello, LLC vs. Commissioner, TC Memo 2016-184.

Mr. Costello inherited Heber E. Costello, Inc. (“HECI”) from his father. In late 2003, Mr. Costello formed a single-member LLC. Mr. Costello then merged HECI into the LLC. Mr. Costello never filed a Form 8832, Entity Classification Election, for the LLC. However, after the merger Mr. Costello reported all of the LLC income on Forms 1120, using HECI’s employor identification number (“EIN”). Mr. Costello filed Forms 940 and 941 on behalf of the LLC for 2006, 2007 and 2008 but did not make sufficient tax deposits to satisfy its employment tax liabilities for 2007 and 2008.

The IRS contended that, under pre-2009 law, Mr. Costello was personally responsible for the unpaid employment taxes of the LLC. Under the former version of IRC Section 301.7701-2(c)(2)(iv), with respect to employment taxes owed for periods prior to January 2009, a disregarded entity was treated in the same manner as a sole proprietorship. Accordingly, the sole member of a single-member LLC, and the LLC itself, were deemed to be a single taxpayer who was personally liable for unpaid employment taxes on wages that were paid before January 1, 2009. Since the unpaid employment taxes related to periods before January 1, 2009, the IRS asserted Mr. Costello was personally liable for employment taxes of his single-member LLC.

The IRS noted a single-member LLC is disregarded as an entity separate from its owner where the single-member LLC had never filed a Form 8832. Mr. Costello, however, argued because the IRS had accepted all of his Forms 1120 filed on behalf of his single-member LLC, he had effectively elected to be taxed as a C corporation notwithstanding he never filed a Form 8832 electing to have the LLC taxed as a corporation. Mr. Costello also argued the IRS should be equitably estopped and forced to treat the LLC as a C corporation for tax purposes since the IRS had accepted the filed Forms 1120.

The court, however, sided with the IRS and ruled the LLC must be taxed as a disregarded entity simply because Mr. Costello never filed a Form 8832 on behalf of the LLC.

Note:   This case involves an employment tax dispute governed by pre-2009 law relating to unsatisfied employment tax liabilities of a single-member LLC.  Nevertheless, this case may present a saving grace opportunity for LLCs and partnerships that mistakenly believe they have elected to be taxed as a corporation for tax purposes.

Keith A. Wood is an attorney with Carruthers & Roth, P.A. in Greensboro.