T.C. Summary Opinion 2007-181
UNITED STATES TAX COURT
JOHN F. AND SUSAN D. MEYER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8471-06S. Filed October 24, 2007.
John F. Meyer and Susan D. Meyer, pro sese.
Joe P. Wilson, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice
and Procedure.
Respondent issued a timely notice of deficiency to
petitioners. Initially, respondent determined a $16,079
deficiency in petitioners’ 2002 Federal income tax. Respondent
reasoned that the expenses claimed on petitioners’ Form 1040,
U.S. Individual Income Tax Return, were not deductible by them
because they were incurred by a corporation and could only be
claimed on a Form 1120, U.S. Corporation Income Tax Return.
Respondent reduced the deductions claimed on petitioners’
Schedule C, Profit or Loss From Business, by $39,257. Prior to
trial, respondent filed a Motion for Leave to File an Answer,
seeking to correct the amount of the deficiency by decreasing it
to $13,410. Respondent represented that the notice of deficiency
had failed to disallow the entire amount of petitioners’ Schedule
C deductions; rather, they should have been reduced by $47,521.
Respondent also inconsistently included in petitioners’ income
$39,529 of Schedule C gross receipts, which triggered self-
employment taxes. In his answer, respondent conceded that
petitioners did not owe self-employment taxes. The issue for
decision is whether petitioners are entitled to deduct the
$47,521 in expenses reported on their Schedule C.
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Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by reference. At the time the petition
was filed, petitioners resided in Orange, California.
John F. Meyer (petitioner) is an engineer and software
developer. Petitioner developed a unique bill payments system
(the technology) that involved the application of a bar code to a
“billhead that had a 1 in 30 billion to 1 in 300 billion error
rate” while “normal bar codes have an error rate of 1 in 2
million or 1 in 20 million.”
In October 2001, petitioner and his partner organized
Pacific Payment Systems, Inc. (PPS) to be “a sales and marketing
company that was going to offer a bill payment service to the
unbanked, underserved” in anticipation of a funding commitment.
They hired the Duane Morris law firm to form PPS, negotiate
deals, and interpret any financing proposals.1 The first funding
commitment fell through. Thereafter, petitioner, on behalf of
PPS, submitted a business proposal to the U.S. Postal Service,
seeking a sponsorship in 2001 that fell through. A commitment in
May 2002 fell through. They did not dissolve PPS, and it
subsequently operated as a going concern in 2003, 2004, and 2005.
1
The contract with the Duane Morris law firm was adopted by
PPS by a resolution dated October 26, 2001.
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Petitioner was a director and the chief financial officer of
PPS, he did not work for any other entity in 2002, and he spent
his time developing the technology and organizing PPS.
Petitioner assigned his interests in the technology to PPS in
2003, and it was not patented until 2005.
Discussion
1. Burden of Proof
Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer has the burden
to prove that the determinations are in error. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). But the burden of
proof is shifted to the Commissioner when he seeks to raise a
“new matter”, which is defined as a new assertion that does not
simply narrow the issue raised in the deficiency notice and
either alters the amount of the original deficiency or requires
the presentation of different evidence. See Rule 142(a); Estate
of Falese v. Commissioner, 58 T.C. 895, 897-899 (1972); McSpadden
v. Commissioner, 50 T.C. 478, 491-492 (1968); Papineau v.
Commissioner, 28 T.C. 54, 57 (1957); Tauber v. Commissioner, 24
T.C. 179, 185 (1955). Where the new assertion merely clarifies
or develops the original determination’s basis without increasing
the deficiency amount, the burden of proof does not shift to the
Commissioner. See Estate of Abraham v. Commissioner, 408 F.3d 26
(1st Cir. 2005), affg. T.C. Memo. 2004-39; Shea v. Commissioner,
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112 T.C. 183 (1999); Wayne Bolt & Nut Co. v. Commissioner, 93
T.C. 500 (1989); Estate of Jayne v. Commissioner, 61 T.C. 744,
748-749 (1974); McSpadden v. Commissioner, supra.
Respondent’s new position, which seeks to increase the
disallowance of petitioners’ Schedule C deductions from $39,527
to $47,521 and to exclude the $39,527 in Schedule C gross
receipts on the ground that the items were reportable by PPS,
falls in this latter category--it merely clarifies or develops
the original determination. The theory in the amended answer is
the same as in the notice of deficiency (i.e., the income and
deductions were reportable by PPS), it does not increase the
deficiency amount, and it does not require the presentation of
new evidence. Therefore, the burden is not shifted to
respondent.
The burden of proof on factual issues that affect a
taxpayer’s tax liability may also be shifted to respondent where
the “taxpayer introduces credible evidence with respect to * * *
such issue.” Sec. 7491(a)(1). Petitioner has not alleged that
section 7491(a) applies; however, we need not decide whether the
burden shifted to respondent pursuant to section 7491(a) because
our analysis is based on the record before the Court and not on
who bears the burden of proof.
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2. The Corporation as a Separate Taxable Entity
Petitioner contends that he properly deducted the expenses
claimed on his Schedule C because PPS was a mere shell, it had no
assets, and he received no benefit from the corporate form or the
expenditures he made.
Generally, a corporation is a taxable entity separate from
its shareholders. In Moline Props., Inc. v. Commissioner, 319
U.S. 436, 438-439 (1943), the Supreme Court stated:
The doctrine of corporate entity fills a useful purpose
in business life. Whether the purpose [is] to gain an
advantage under the law of the state of incorporation
or to avoid or to comply with the demands of creditors
or to serve the creator’s personal or undisclosed
convenience, so long as that purpose is the equivalent
of business activity or is followed by the carrying on
of business * * *, the corporation remains a separate
taxable entity. [Fn. ref. omitted.]
Consequently, a shareholder is not entitled to a deduction for
the payment of corporate expenses. Deputy v. du Pont, 308 U.S.
488, 494 (1940). Rather, the corporate expenditures that were
not reimbursed constitute capital contributions and increase the
cost basis of the shareholder’s stock to the extent that they can
be substantiated. See Ward v. Commissioner, 20 T.C. 332, 334
(1953), affd. 224 F.2d 547 (9th Cir. 1955).
The courts have also recognized exceptions to the general
rule. In Moline Props., Inc. v. Commissioner, supra at 439, the
Supreme Court also stated that the corporate form may be
disregarded when it is determined that the corporation is a sham
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or unreal. And the Court has recognized that if the corporation
is merely an empty shell, which has no assets and has not
conducted any business activity, then it is not a separate
taxable entity. Blue Flame Gas Co. v. Commissioner, 54 T.C. 584,
599 (1970); see also Barker v. Commissioner, T.C. Memo. 1993-280
(citing Bystry v. United States, 596 F. Supp. 574, 579 (W.D. Wis.
1984) and Blue Flame Gas Co. v. Commissioner, supra). But a
taxpayer’s claim that his corporation should be disregarded will
be closely scrutinized. Strong v. Commissioner, 66 T.C. 12, 25
(1976), affd. without published opinion 553 F.2d 94 (2d Cir.
1977). And a taxpayer’s choice to adopt the corporate form
because of its advantages also requires the acceptance of its tax
disadvantages. See Burnet v. Commonwealth Improv. Co., 287 U.S.
415 (1932).
Whether a corporation is organized for a business purpose or
carries on substantial business activity is determined from the
facts and circumstances of each case. See Strong v.
Commissioner, supra at 24-25; Ross Glove v. Commissioner, 60 T.C.
569, 589 (1973; Weigman v. Commissioner, 47 T.C. 596, 605 (1967),
affd. per curiam 400 F.2d 584 (9th Cir. 1968); Bystry v. United
States, supra at 578. The Court has stated that the “degree of
corporate purpose and activity requiring recognition of the
corporation as a separate entity is extremely low.” Strong v.
Commissioner, supra at 24. The determination of whether a
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corporation is “doing business is not necessarily dependent on
the quantum of business and [the] business activity may be
‘minimal.’” Id. (quoting Britt v. United States, 431 F.2d 227,
235, 237 (5th Cir. 1970)).
The Court finds that PPS was in existence, and as such, it
is a separate taxable entity for the following reasons: (1) PPS
served its organizational purpose in that a potential investor
required its formation before he would invest in 2001; (2) it
held itself out as actively engaged in business when it submitted
a business proposal to the U.S. Postal Service and actively
sought other investors in 2001; (3) it adopted a contract with a
law firm in 2001 to negotiate and interpret agreements with
investors so that it could obtain venture capital; (4) it applied
for and received an employer identification number in 2001; (5)
it opened a bank account; and (6) the record contains invoices
for purchases of machinery and equipment that were issued in
PPS’s name and dated February 15 and May 15, 30, and 31, 2002,
which were paid by company checks or credit cards.
Because petitioners have not proven that any of the $47,521
in Schedule C expenses were paid or incurred by petitioner in his
individual capacity rather than by PPS and the Court has
determined that PPS was a separate taxable entity, it follows
that petitioners are not entitled to deduct the expenses claimed
on the Schedule C attached to their 2002 joint Federal income
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tax return. Accordingly, respondent’s determination is
sustained.
To reflect the foregoing,
Decision will be entered for
respondent.