Tax Court in Brief | Hacker v. Com’r | Constructive Dividends, Unexplained Deposits, and Corporate Spending

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The Tax Court in Brief – March 7th, 2022 – March 11th, 2022

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Tax Litigation:  The Week of March 7, 2022, through March 11, 2022

Hacker v. Comm’r, T.C. Memo. 2022-16 | March 8, 2022 | Paris, J. | Dkt. No. 3870-12

Short Summary: Taxpayers, Barry Hacker and Celeste Hacker (the Hackers), were sole shareholders and sole officers of Blossom Day Care Centers, Inc. (Blossom), Hacker Corp. (an S corporation), and Hacker Investments, a limited liability company. The IRS examined the Hackers, with a focus on, among other things, unreported cash deposits, income received from Blossom and Hacker Corp., and numerous transactions among and between the Hackers and their companies that were not reported, or that were underreported on the Hackers’ federal tax returns for the five years examined. In a previous proceeding, the IRS examined Blossom, and judicial determinations of that matter affected the resolution of many issues in this case. The focus in this case is the propriety of the IRS’s deficiency findings relating to imputed wages, constructive dividends, corporate spending and credit card abuse, classification of capital expenditures, interest deductions, related-party property transfers, and unexplained deposits, as well as fraud-related penalties assessed against the Hackers.

Primary Holdings:

Key Points of Law:

Insights:  This case involves numerous issues of mismanagement of the assets of closely held companies and poor accounting practices relating to transactions and property transfers. Abuse of company credit cards, unexplained deposits, and indirect financial benefit from related companies may constitute reportable gross income to the recipient control person or shareholder who benefits in any way from those transactions. Individuals and business entities alike are subject to the substantiation and documentation requirements of the Code and Treasury Regulations. Without proper documentation, the IRS may, by circumstantial evidence, establish accuracy- and even fraud-related penalties, which can be substantial. And, in an IRS examination it is advisable to refrain from providing vague, misleading, or false statements to the examining agent.

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