This tidbit was published in the Kleinrock's Federal Tax Bulletin dated November 6, 2006.
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A taxpayer was required to include as income his proportionate share of undistributed income from an S corporation in which he was a shareholder with his former wife. Sweeney v. Commissioner, T.C. Summary 2006-169 (10/19/06).
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Thomas Sweeney was married to Cheryl Sweeney during 2002. In 2000, Thomas and Cheryl had incorporated Lake Vista Billing Services, Inc. Thomas was the registered agent for the corporation: Cheryl was the president, and Thomas was vice president and a stockholder. The stated purpose for the corporation was “medical hilling for physicians’ practices.” Thomas and Cheryl each owned 50 percent of the corporation.
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The activity of the corporation was simply the collection of fees charged by doctors to their patients for medical services. Cheryl performed all the activities of the corporation by visiting doctors’ offices weekly picking up their billing invoices, collecting payment of these invoices from primary and secondary insurers, and collecting directly from each patient the portions not covered by insurance. Thomas was not involved in this activity but was employed as an insurance instructor for an unrelated employer.
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For 2002, a Form I I 20S, U.S. Income lax Return for an S Corporation, was filed showing I the corporation‘s taxable income of. $18,627. The return reflected issuance to the shareholders of the corporation Schedules K-1 which reflected a Schedule K-1 for Thomas in the amount of $9,314, one-half of the corporation’s net income. Thomas did not include any income from the corporation on his 2002 return. Thomas and Cheryl each filed income tax returns as married filing separately. Cheryl reported on her return one-half of the taxable income of the S corporation. In a notice of deficiency. the IRS determined a deficiency against Thomas for the unreported $9,314 in flow-through income from Lake Vista Billing Services, Inc.
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Thomas claimed that he never received any of the proceeds of the corporation’s profitable activity for 2002. He testified that he and his wife had serious problems between them during that year. During the second week of .January 2002, according to Thomas, Cheryl proceeded to throw him out of his home, which is where the business was located. She changed the locks. She stripped the corporate hank accounts, personal hank accounts, charged up all the cash she could on his credit cards, and she physically. lock, stock, and barrel, locked him out of the corporation
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The Tax Court held that all formalities of the Code had been followed with respect to the S
.corporation for the year 2002, and the distributive share of its income to Thomas is taxable income to him.
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Although it was obvious, said the court, that Thomas and his spouse had serious differences between them, the Tax Court is not the proper forum for the resolution of those differences. Since all the formalities with respect to the S corporation were followed, Thomas had to include in income his distributive share of the S corporation income.
