Tuesday, August 08, 2006

Am I Dead or Am I In Miami?

Last year, I commented on the case of Maloof v. Commissioner after the Tax Court had rendered its opinion. The case raised the question of whether a shareholder's guarantees of an S corporation's loans could be used by the shareholder to increase his basis for using S corporation losses. The Tax Court held that loan guarantees could not be used to increase basis.

Last week, the 6th Circuit Court of Appeals handed down the decision on Maloof's appeal. As expected, it upheld the Tax Court on all points. The decision underlines the substantive point that I made last year that:
LLCs classified as partnerships or as disregarded entities have benefits over S corporations. Were [Maloof's] company an LLC classified as a partnership or a disregarded entity, [Maloof] would have obtained the benefits he sought.
In addition to discussing the main issue, I also focused on one of the peripheral arguments raised by the taxpayer: That the Tax Court should have applied the decisional law of the 11th Circuit since the taxpayer lived there with his mother, rather than the 6th Circuit, where the taxpayer's wife lived. I thought that the argument was frivolous and I said, "Note to Counsel: Your client's name is 'Maloof' not 'Oedipus.'"

Oddly, Maloof continued to press the question of his residency and thus the proper appellate court to entertain the appeal. The appeals court made short work of the argument:
Maloof, finally, argues that because he lived in Florida at the time he filed his petition in tax court, Eleventh Circuit precedent should control this appeal. See 26 U.S.C. § 7482(b)(1)(A) ("[Decisions of the United States tax court] may be reviewed by the United States court of appeals for the circuit in which is located . . . the legal residence of the petitioner."). That he volitionally filed this challenge to the Tax Court's decision in the Sixth Circuit, not the Eleventh Circuit, makes this something of a bewildering argument. . . . But the argument is of no moment anyway. . . . Maloof cannot show that the application of Eleventh Circuit precedent would make any difference to the outcome of this appeal.
Final Note to Counsel: Florida is hot and has alligators and palm trees. Ohio is not as hot and has no such fauna or flora.

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