Tuesday, October 6, 2020

What To Do When You Contribute $275,000 To A Not-For-Profit Which Has Never Filed For Federal Tax Exempt Status?

What To Do When You Contribute $275,000 To A Not-For-Profit Which Has Never Filed For Federal Tax Exempt Status? That's A Lot of Money To Leave On The Table, So The Taxpayer Got Creative....

William Delaney, EA
Westwood, MA
Waterfront Fashion Week, Inc. was organized in KY as a nonstock, nonprofit corporation on May 8, 2012.  At all relevant times, Clinton Deckard was Waterfront’s President and one of its three Directors.  Although state chartered as a not-for-profit, the corporation never applied for federal tax-exempt status.

During its existence, Waterfront produced an event for the benefit of another KY nonprofit corporation; the event lost money; Waterfront made no “cash charitable contribution” to the other nonprofit.  Apparently, this was the full extent of Waterfront’s charitable activity in KY.  It was mostly funded by Mr. Deckard’s $275,000 “contribution” made sometime in August 2012.

The corporation was administratively dissolved on Sept. 28, 2013 for failure to file its 2013 annual report.  Waterfront subsequently filed a reinstatement application, which was accepted.  On Sept. 30, 2014, the corporation was again administratively dissolved because it failed to file an annual report.  (KY apparently is a quick draw state; neither MA nor RI would react so quickly).

Now for the really creative part of this narrative (believe me, you cannot make this up---it really happened).  On Oct. 28, 2014 (almost one month after the administrative dissolution), Waterfront filed a Form 2553 (S corporation election) with the IRS, retroactive to May 8, 2012.  Mr. Clinton Deckard signed the form as President of the corporation and also as its 100% shareholder (give that man a prize for hutzpah).

On Jan. 13, 2015, Waterfront filed forms 1120S for stub year 2012 and calendar year 2013, reporting operating losses of $277,967 and $3,239 respectively.  As its sole shareholder, Mr. Deckard received a Schedule K-1 on which these non-passive operating losses were passed-through to him; the losses were claimed on his federal Schedule E and deducted against his federal 1040 income.  So, now he had recovered his $275,000 “contribution” to the corporation!  Great tax planning, except for one little thing…the IRS came calling and issued, not surprisingly, a notice of deficiency.

Oh, but it gets better.  Now for the counter argument that the IRS (how can it be) is not correct…

The IRS asserted that the S election was invalid and that Mr. Deckard was not a shareholder in Waterfront (how dare they challenge his sworn affidavit).  So, how did Mr. Deckard defend himself against the notice of deficiency?  Read on…

He first argued substance over form (one of your editor’s favorite themes, but one which doesn’t work in this context).  Mr. Deckard “…asserts that he intended Waterfront to be a for-profit entity and ‘objectively operated’ it ‘consistently with it being a for-profit entity that he owned entirely’”…and that he was “mistakenly unaware of these formalities of corporate law” so he treated the corporation as if he were “the sole owner in every practical sense.”

The U.S. Supreme Court, when confronted with a somewhat similar argument, stated:  “While a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not.”  Comm. v. Nat’l Alfalfa Dehydrating & Milling Co, 417 US 134, 149 (1974).

OK, there goes one asserted position, so let’s try another…lack of tax-exempt status.

“Petitioner (i.e. Deckard) suggests that because Waterfront never gained tax-exempt status (which it never sought), it should be regarded as a for-profit corporation.  For-profit corporations have shareholders,” which somehow circumvents the fact that Waterfront is [was, because it has been administratively dissolved] a nonstock KY corporation.

Problem is that Deckard is right, in part.  Waterfront is a filer of a federal 1120, but not because it is now a stock corporation.  Instead, this is a default filing when you fail to obtain tax-exempt status.  So, why cannot an 1120 filer elect S corporation status?  Because that is an election made by the shareholders, of which there are none, Mr. Deckard’s assertion notwithstanding.  Under the KY statute, as is the case with most states, a not-for-profit corporation does not have shareholders, owners, and/or capital stock.  Clinton Deckard v. Comm. of Revenue, 155 T.C. No. 8, 9/17/2020.

Tuesday, September 22, 2020

Annual Board Member Nominations


Pursuant to Article VI, Section 2 of the Bylaws of the Massachusetts/Rhode Island Chapter of National Association of Tax Professionals, we the nominating committee, appointed by Ronald Fisher, President and the Board of Directors, hereby propose the following members to fill the expiring Directors’ positions for the year ending December 31, 2020.


Region            Term                     Name and Address

1                         3yr                          Walter Drenen, 89 S. Maple Street, Westfield, MA 01085

2                         3yr                          David L. Johnson, 100 Doyle Road, Holden, MA 01520

3                         3yr                          Jeffrey Schweitzer, 667 South Street, Wrentham, MA 02093

4                         3yr                          Joseph F. Gniadek, 16 Carver Street, #201, Plymouth, MA 02360

5                         3yr                          Paul DeBlois, 15 Money Hill Road, Ste 7, Chepachet, RI 02814


Furthermore, please be aware that under Article IV, Section 5 of the Bylaws, notice of the election shall be provided to every member 30 days prior to the date set to announce the result of the director elections.  The notice of election may be sent by ordinary mail as either a separate mailing or within other content such as a regular newsletter or other communication.

The election will be held on Tuesday, October 27, 2020 at the virtual annual meeting. Board of Directors will meet simultaneously at the Holiday Inn, Mansfield, MA.

Respectfully submitted,

Nomination Committee Members:

Mary Ellen Fillo, Pro Tem Chair                                                                                                                  

Joan Gniadek

Dorothy Grabowski

Wednesday, August 5, 2020

Massachusetts Paid Family and Medical Leave Taxation Issues

Now that a few months have passed and this new tax has been deducted and/or employer only paid, have we handled it correctly?  What’s to handle, you might ask?

William Delaney, EA
Westwood, MA
I haven’t seen anyone draw down on this fund (with good reason---it’s too soon for benefits to kick-in).  Yes, but is it taxable when it does suddenly appear in a subsequent year – or currently for a RI resident (more on this later).

What about the employee payroll deductions?  If you are like me, at least half of the   W-2 forms which should have shown something in box #14 did not have an entry.  If there is an entry, did you do anything with it?  It qualifies as a SALT (state and local [income] tax) so it should be posted to Schedule A---subject to the $10,000 annual limitation.   For authority, see CCA 200630017 (7/28/2006).

Is it taxable income when received.  YES, according to the Chief Counsel’s Advice cited above.  If you received an itemized deduction for the employee payment, the entire benefit is taxable when received.  If you were unable to itemize, the amount of the payroll deduction becomes your tax basis and it is excluded from taxable benefit income.

While this is the federal rule for the Massachusetts and Rhode Island State plans, other state plans may be treated differently. 

And, if you have not forgotten, the RI “tax” qualifies as a state tax when computing the maximum amount of credit on the MA resident return for taxes paid to another state.  See MA Revised Directive 12-1 (3/15/12).  Does RI reciprocate?  Not at this time.  The regulation in effect since 1/1/1998 is PIT 98-12 and it specifies (see part IV) that the allowable state income tax must be similar to what is allowed on the RI personal income tax return.  The RI personal return only allows (Schedule W) a credit for withholding tax shown on form W-2, box #17).  RI does not follow the MA “rule.”

Wednesday, June 10, 2020

COVID-19 Relief Town Hall Discussion

COVID – 19 Relief Town Hall Discussion
with the IRS and Massachusetts Departments of Revenue and Unemployment Assistance
Date   Thursday, June 11, 2020
Time   10:00 a.m. Eastern Time

Call in Telephone Number: (888) 331-8226      Access Code:  5206386

This free 45-minute teleconference is open to all.

Learn about:
  • Postponed Federal and state of Massachusetts Filing and Payment Deadlines
  • Economic Impact Payments - From $1,200 To $2,400 (Even more with qualifying dependents)
  • Free File – File for free using Free File tax software or Free File Fillable Forms
  • Resources & Guidance - Find out where to get the information you need to learn more about the Coronavirus economic tax relief
  • Department Unemployment Assistance – 3 new temporary federal programs
  • Department of Revenue – Taxability of Unemployment Benefits
    • EITC rule
    • MassTax Connect
    • VITA Assistance