Tax Court

Psychometrician ≠ Tax Expert

Professor Emeritus Lawrence M. Aleamoni is a psychometrician.  I am not exactly sure what that means, but I assure you that it does not mean “tax expert.”  Actually, it seems that one may not have to have taken a single accounting course to be a psychometrician.

Professor Aleamoni many years ago established a corporation in which to operate his “outside” consulting and work activities.  In the years before the Tax Court – 2010, 2011, and 2012 – the corporation was taxed as a C corporation.  Professor Aleamoni and his wife owned 50% of the corporation and his children owned the other 50%.  So far, so good.

In the years in question, Professor Aleamoni made loans to the corporation.  In each of those years, the corporation duly recorded the loans as shareholder loans (liabilities) on its balance sheet in its tax return.  In each of those years, the corporation reported gross income and deductions that yielded “negative taxable income,” or what we accounting cognoscenti call a “loss.”  One could logically conclude that the losses were funded by the shareholder loans.  Nothing’s wrong with this.

At the same time that the loans were being recorded by the corporation as being a liability to the shareholder, such shareholder was not recording the loans as assets on his books.  Professor Aleamoni was reporting the advances as deductions on Schedule C of his tax return, entitling them “Personal Loan to Business.”  So, Professor Aleamoni was deducting the payments that he was making to his corporation that was not reporting such payments as income and was apparently using that money to pay for deductions that caused the losses for the corporation.  Oops, on so many fronts.

I would wager that sometime about the third or fourth week of an Accounting 101 class, the students would unanimously recognize that you can’t do what Professor Aleamoni did.

Professor Aleamoni went on to argue that the IRS had not caught this problem on a prior audit.  Thus, says he, the IRS cannot bring up the issue in this later audit.  Wrong.

After I finished reading this summary opinion by the Tax Court, I wondered what self-respecting tax attorney would bring this case before the Tax Court.  I went back to the beginning of the court’s opinion to advance that inquiry.  The answer was that no self-respecting lawyer had involvement in the case.  Professor Aleamoni represented himself.  I should have guessed that.

VKM

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