HEATHER P. DUNN AND EDISON DUNN, v. COMMISSIONER OF INTERNAL REVENUE, 11/9/2022
The IRS may assess penalties for business deductions where assets are not titled properly. This can happen if the taxpayer fails to properly document the ownership of an asset or if the asset is not used primarily for business purposes. The penalties for these types of violations can include fines and interest charges, and may also result in the disallowance of the deductions in question. Additionally, if the amount is large emough, additional penalties, may be imposed.
Here, the taxpayers attempted to deduct amounts that were properly deductible by their wholly-owned corporation, and vice versa – an error that could have been corrected with accurate bookkeeping.
Taxpayers formed Magnet Development, LLC (Magnet), to manage investments in real estate. Later, Magnet purchased a 21-unit apartment building in Georgia. Taxpayers owned additional properties in Athens and Snellville, Georgia, in their individual names and which they managed on their own.
In 2013 and 2014 Magnet reported income, expenses, and resulting losses of $3,662 and $5,100 for 2013 and 2014, respectively, for the properties in Athens and Snellville. However, petitioners owned these properties in their individual capacities, not Magnet. Petitioners did not provide any evidence to show that Magnet was entitled to deduct these losses. Accordingly, petitioners are not entitled to deduct them as flowthrough losses.
