Our MA/RI Annual Meeting is tomorrow - October 27th, 2020 from 10-11 a.m. The meeting will be held virtually, so if you have not already registered, please take a moment to register now. By registering today, you will ensure you space at the meeting and get the log on information, be able meet the current board and vote for our new directors for the 2021 Calendar Year.
Thank you for your support of our chapter!
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IR-2020-238, October 20, 2020
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| William Delaney, EA Westwood, MA |
We also know that the cash, at the time of receipt, was not considered to be taxable income. It was a bank loan to be repaid, so there was no need to record income, nor were there any restrictions on deducting expenses paid from that income source (how you go about tracing the activity is a question for another day).
Now comes our friendly SBA Administration and we assume that it approves our form 3508 application and forgives $10,000 of that loan! We are left with the need to remove $10,000 from the liability account on the balance sheet – Bank Loan Payable. Perhaps it is the entire amount; perhaps not, but the principle is the same. Leave it to the IRS to gum up the works when they declared (IRS Notice 2020-32) that they would not allow the expense deductions associated with that money. How do you trace it so that you don’t deduct it. Rather than subscribe to the Theatre of the Absurd, I suggest that you make a simple bookkeeping entry (assuming the loan forgiveness is NOT taxable)…
Dr. Bank Loan Payable $ 10,000
Cr.
Disallowed Expenses $ 10,000
Without
the need to specifically identify, the bottom line has been adjusted and
taxable income is properly calculated.
End of story? Ah, not so fast…
What happens in MA??? See MA TIR 20-09 (7/13/20). You guessed it…we have a different rule! Since MA follows the federal Code as of 1/1/2005, there is no federal CARES Act. The PPP program doesn’t exist. As a result, “…any amount forgiven under §1106 of the (CARES) Act is includible in gross income and subject to tax, and there is no disallowance of deductions…”
Therefore, the MA bookkeeping entry would be…
Dr.
Bank Loan Payable $ 10,000
Cr. Debt Forgiveness Income $ 10,000
Meanwhile, if the Congress does NOT decide to recognize the forgiveness as tax free, your federal bookkeeping entry would be the same as the above MA entry.
So, now we’ve nailed this thing! Right? Nope---wrong! The above rule applies only to personal income tax. It does not apply to the corporate excise tax, since MA follows the federal Code currently in effect (with exceptions) for purposes of corporate taxation. The MA rule for forgiveness of corporate debt is…
“…any amount forgiven for a corporate borrower under §1106 of the (CARES) Act would be excluded from Massachusetts gross income, and any deductions disallowed in accordance with IRS Notice 2020-32 would likewise be disallowed for Massachusetts tax purposes.”
Therefore, our corporate bookkeeping entry would be (assuming federal forgiveness)…
Dr. Bank Loan Payable $ 10,000
Cr.
Disallowed Expense $ 10,000
Otherwise,
the federal recognition of corporate debt forgiveness income would apply as
well to the state corporate return and the bookkeeping entry would be…
Dr.
Bank Loan Payable $
10,000
Cr. Debt Forgiveness Income $ 10,000
Now
we have it, at least until/unless they change it.
Gov. Charlie Baker, MA
Included in Governor Baker's recently introduced budget proposal for the current fiscal year is a plan to delay the tax year 2020 allowable MA cash charitable contribution deduction until tax year 2021. This deduction is allowed for all state taxpayers, even if you do not federally itemize or even file a federal return. Non-cash contributions (clothing, food, vehicle, etc.) are not allowed. Since the deduction is mandated under a 2002 addition to state law, the proposed delay needs legislative approval.
Our MA/RI Annual Meeting will be next week on October 27th, 2020 from 10-11 a.m. The meeting will be held virtually, so if you have not already registered, please take a moment register now. By registering today, you will ensure you space at the meeting and get the log on information, be able meet the current board and vote for our new directors for the 2021 Calendar Year.
Hope to see you all online next week!
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....
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| William Delaney, EA Westwood, MA |
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.
