June 20, 2017

LIFE UNDER THE ADMINISTRATIVE STATE: Take a look at this real-life tax horror story.

The taxpayers were a married joint-filing couple who owned a Michigan ticket sales company called Ultimate Presales. The husband started the business in 2006 and was the proprietor. The business involved buying and reselling tickets to sporting events, concerts, and other events. The business was intended by the taxpayers to be treated as a sole proprietorship for tax purposes. So all the federal income tax results from the business should have been reported on the taxpayers’ Form 1040. Simple!

Unfortunately, one of the taxpayers’ sons incorporated Ultimate Presales in the state of Michigan in July of 2006, using an online legal service. This was done without the parents’ permission and while the son was still a minor. Not surprisingly, the son was unaware of the important tax differences between a sole proprietorship and a corporation. When the corporate paperwork from the state arrived in the mail, the husband (the proprietor) did nothing to unwind the unintended incorporation. In fact, he compounded the son’s error by filing annual corporate reports for Ultimate Presales with the state of Michigan.

The taxpayers used their personal credit cards to pay for expenditures related to the business. All income from the business was deposited into the taxpayers’ personal bank accounts. For 2008 and 2009 (the tax years in question), the husband prepared and filed the couple’s federal income tax returns (Form 1040). The returns included Schedules C (Profit or Loss from Business) showing losses from Ultimate Presales of $41,610 for 2008 and $44,066 for 2009.

In 2010, the IRS issued the taxpayers a bill for unpaid taxes for 2008 and 2009. The notice reflected the disallowance of the taxpayers’ Schedule C losses on the grounds that Ultimate Presales was a separate incorporated taxpayer. The unhappy taxpayers took their case to the Tax Court, but the husband passed away before they got there.

Keep your paperwork in order, comrade.

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