Hang v. Comm'r of Internal Revenue
| Decision Date | 18 July 1990 |
| Docket Number | Docket No. 9367-89. |
| Citation | 95 T.C. 74,95 T.C. No. 6 |
| Parties | WILLIAM M. HANG AND DEBORAH S. HANG AND DAVIDAN ORTHODONTIC LAB, INC., DAVID R. HAMG, TAX MATTERS PERSON, DEBORAH S. HANG, GUARDIAN AND DANIEL W. HANG, A PERSON OTHER THAN THE TAX MATTERS PERSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Respondent issued Final Notices of S Corporation Administrative Adjustment (FSAA) for 1984 and 1985 in which he reallocated income of an S corporation from the shareholders of record to H, who is not a shareholder of record. Petitioners moved to dismiss and/or for partial judgment on the pleadings with respect to the reallocations for 1984 and 1985. HELD, the reallocation of a subchapter S item from shareholders of record to a taxpayer who is not a shareholder of record is not within the scope of judicial review in an S corporation proceeding. Charles T. Shea and Dennis R. Pearson, for the petitioners.
Mary P. Hamilton and Ronald F. Hood, for the respondent.
This case is before us on petitioners' motion to dismiss and/or for partial judgment on the pleadings. Respondent issued Notices of Final S Corporation Administrative Adjustment (FSAA) for the S corporation returns of Davidan Orthodontic Lab, Inc., (Davidan) for the taxable years 1984 and 1985. Respondent made no adjustment to ordinary income for Davidan for either 1984 or 1985. However, respondent determined that for Federal tax purposes, the beneficial owner of Davidan for 1984 and 1985 was William M. Hang. Respondent allocated income in the FSAA's as follows:
Petitioners argue that to the extent that the FSAA's attempt to reallocate the taxable income of Davidan to William Hang, the FSAA's are invalid because the attempted reallocation is not a ‘subchapter S item‘ as defined in section 6245 1 and section 301.6245-1(a), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 3003 (Jan. 30, 1987). Petitioners also argue that the FSAA s were invalid for taxable years 1984 and 1985 because Davidan was a small S corporation for those years and therefore not subject to the S corporation audit and litigation procedures. Respondent contends that because ordinary income of an S corporation and distributions from an S corporation are subchapter S items, the proposed reallocation is within the scope of judicial review in an S corporation proceeding under section 6226(f). See sec. 6244. Respondent also contends that Davidan was not a small S corporation for 1984 and 1985 because there were two shareholders of record for those years. We must decide (1) whether the reallocation of income from David and Daniel Hang to William Hang is within the scope of judicial review in an S corporation proceeding; and, if so, (2) whether Davidan was a small S corporation in 1984 and 1985.
A hearing was held on petitioners' motion on March 12, 1990, in Boston, Massachusetts.
Petitioners William and Deborah Hang are husband and wife, and are the parents of petitioners David and Daniel Hang, who are minors. William M. Hang is an orthodontist. Davidan is a subchapter S corporation whose two record shareholders are David and Daniel Hang. Deborah S. Hang is the legal guardian of David and Daniel Hang.
Respondent issued a statutory notice of deficiency to William and Deborah Hang on February 10, 1989. In the notice of deficiency, respondent determined that William and Deborah Hang had unreported income from Davidan in the amounts of $16,317 in 1983, $13,758 in 1984, and $18,436 in 1985. The notice of deficiency also allowed as investment tax credits in 1983 certain amounts previously claimed as carrybacks to 1980. The resulting deficiencies were as follows:
+--------------------+
¦TYE ¦Deficiency ¦
+--------+-----------¦
¦12/31/80¦$6,166 ¦
+--------+-----------¦
¦12/31/83¦1,740 ¦
+--------+-----------¦
¦12/31/84¦5,800 ¦
+--------+-----------¦
¦12/31/85¦6,723 ¦
+--------------------+
Respondent also issued FSAA's with respect to Davidan for the tax years ending October 31, 1984, and October 31, 1985, reallocating the income of Davidan to William M. Hang, as follows:
1. On March 3, 1989, an FSAA was issued to David R. Hang, Tax Matters Person, c/o Deborah Hang, Guardian, for the taxable year ending October 31, 1984.
2. On April 11, 1989, an FSAA was issued to Daniel W. Hang and Douglas K. Siebert for the taxable year 1984.
3. On March 3, 1989, an FSAA was issued to Tax Matters Person, Davidan Orthodontic Lab, Inc., c/o Deborah Hang, for the taxable year ending October 31, 1985.
4. On April 4, 1989, an FSAA was issued to Daniel W. Hang and Douglas K. Siebert for the taxable year 1985.
Petitioners timely filed a petition in this Court in which they requested a redetermination of the tax deficiencies set forth in the notice of deficiency issued to William and Deborah Hang, and a readjustment of the reallocation of income set forth in the FSAA's issued with respect to Davidan.
On July 13, 1989, respondent filed a motion to dismiss for lack of jurisdiction and to strike. Respondent moved that the Court dismiss that part of the case involving income tax deficiencies of William and Deborah Hang for the taxable years 1984 and 1985, and to strike all references in the pleadings thereto, on the ground that all of the adjustments to petitioners' 1984 and 1985 taxable years set forth in the February 10, 1989, notice of deficiency arise from William Hang's interest in Davidan, a subchapter S corporation. On September 18, 1989, the Court granted respondent's motion.
On February 21, 1990, respondent filed with the Court a motion to sever issues and continue trial on the merits in which he requested that the issue concerning allocation of income among petitioners be severed from the remainder of the case and that the allocation issue be continued. On February 27, 1990, the Court granted respondent's motion.
On January 17, 1990, petitioners filed a motion to dismiss and/or for partial judgment on the pleadings in which they moved the Court to dismiss, and/or to grant petitioners judgment on the pleadings, with respect to the redeterminations and/or reallocations made by respondent with respect to petitioners for tax years 1984 and 1985.
The first issue we must consider is whether the reallocation of income from David and Daniel Hang to William Hang is within the scope of judicial review in an S corporation proceeding. The S corporation audit and litigation procedures, sec. 6241 et seq., were added to the Code in 1982 to provide a method for unified treatment of subchapter S items among the shareholders. Subchapter S Revision Act of 1982, Pub. L. 97-354, sec. 4(a), 96 Stat. 1691-1692; see S. Rept. 97-640, at 25 (1982), 1982-2 C.B. 718, 729. A subchapter S item is ‘any item of an S corporation to the extent regulations prescribed by the Secretary provide that, for purposes of this subtitle, such item is more appropriately determined at the corporate level than at the shareholder level. ‘ Sec. 6245. The tax treatment of subchapter S items, except as otherwise provided by regulations, is determined at the corporate level. Sec. 6241. Each shareholder in an S corporation shall ‘be given notice of, and the right to participate in, any administrative or judicial proceeding for the determination at the corporate level of any subchapter S item.‘ Sec. 6243. The subchapter S corporation audit and litigation procedures and the accompanying legislative history reflect a desire on the part of Congress to have only items that are more appropriately determined at the corporate level determined in subchapter S corporation proceedings. Secs. 6241 and 6245; S. Rept. 97-640, at 25 (1982), 1982-2 C.B. 718, 729.
The Subchapter S Revision Act of 1982, supra, was enacted shortly after the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324, which added the partnership audit and litigation procedures, sec. 6221 et seq., to the Code. Congress decided that the subchapter S audit provisions should generally follow the partnership audit provisions except as modified by Treasury regulations. S. Rept. 97-640, at 25 (1982), 1982-2 C.B. 718, 729. Section 6244 makes certain provisions of the partnership audit and litigation procedures relating to partnership items applicable to subchapter S items except as modified or made inapplicable by regulations. Section 6244 provides:
SEC. 6244. CERTAIN PARTNERSHIP PROVISIONS MADE APPLICABLE.
are (except to the extent modified or made inapplicable in regulations) hereby extended to and made applicable to subchapter S items.
The partnership provisions concerning judicial review, sections 62 26-6228, are applicable to S corporations. S. Rept. 97-640, at 25 (1982), 1982-2 C.B. 718, 729. Sec. 6226(f) provides:
(f) SCOPE OF JUDICIAL REVIEW. -- A court with which a petition is filed in accordance with this section shall have jurisdiction to determine all partnership items of the partnership for the partnership taxable year to which...
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