Posted on November 10, 2011
Facts: the taxpayer had organized his trucking business into several different wholly-owned businesses for a variety of reasons, including separating assets from liability for higher risk activities. Taxpayer was the sole member in an LLC (the “LLC”), which owned trucks and was the sole shareholder in a C corporation (the “Corporation”), which hauled goods. The LLC had no employees, while the Corporation had at least 18 employees which were mainly office personnel, including the taxpayer. The Corporation’s employees performed all of the management and administrative services for the LLC, although no time records or written contracts were recorded to evidence such. Taxpayer passed through roughly $100,000 of expenses from theLLC (as he was the sole shareholder) for payments LLC made to Corporation. On audit, the IRS disallowed roughly half of the expenses. The taxpayer argued that such expenses were reasonable and necessary, as they were for consulting, accounting, sales management, and safety services. The Tax Court found that there was no proof of the costs of such services, as there were no records. Additionally, the taxpayer provided the consulting services, but provided them to the LLC which had no employees. Therefore, taxpayer was consulting to himself. The Tax Court upheld the IRS’s disallowance of the business expenses.
The taxpayer should have kept a better paper trail of the expenses of all of his entities and actually only taken deductions for expenses actually incurred. Some additional planning beyond the separation of risk may have caused the taxpayer to move various administrative functions into theLLC to support a management fee. For more information on this holding, see Fuhrman, TC Memo 2011-236.
For further information, please contact any Knox Business & Tax attorney at (814) 459-2800.
Article written by P. Bowman Root IV.