                        T.C. Memo. 2009-70



                      UNITED STATES TAX COURT



          ROBERT E. AND JUDITH C. DANSBY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6708-05.               Filed March 30, 2009.



     Robert E. and Judith C. Dansby, pro se.

     Alysse B. Grossman, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     SWIFT, Judge:   Respondent determined a $133,690 deficiency

in petitioners’ 2002 joint Federal income tax and a penalty under

section 6662(a).

     Among the adjustments made in respondent’s notice of

deficiency and challenged in petitioners’ petition was the

taxability to petitioner Robert E. Dansby (petitioner) of
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unreported early distributions petitioner received from his

individual retirement account.    Petitioners have raised a new

issue as to whether a closely held corporation qualified as an S

corporation and, if so, whether alleged corporate losses are

allocable to petitioner to offset the unreported income raised in

respondent’s notice of deficiency.       At this time the only issue

addressed is whether the corporation in 2000 filed with

respondent a Form 2553, Election by a Small Business Corporation.

     Unless otherwise noted, references to sections are to the

Internal Revenue Code applicable to the year in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.


                            FINDINGS OF FACT

     On audit respondent determined, among other things, that

petitioners had not reported for 2002 taxable income of $304,889

in distributions petitioner received from an individual

retirement account (IRA).    On January 10, 2005, respondent’s

notice of deficiency was mailed to petitioners.

     On April 11, 2005, petitioners filed their petition

challenging the taxability of the IRA distributions and the

penalties.

     Shortly before the October 16, 2006, scheduled trial herein,

petitioners and respondent negotiated a tentative settlement of

the issues raised in petitioners’ petition.      On October 16, 2006,
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however, petitioners raised a new issue involving alleged losses

of Edgenics, Inc. (Edgenics), an alleged S corporation in which

petitioner claimed to have an ownership interest.    Petitioners

claimed that Edgenics realized significant losses and that the

losses should flow through to petitioner as owner of Edgenics and

offset the unreported IRA distributions.

     In view of the tentative settlement of the original issues

and in view of the new issue raised by petitioners, the October

2006 trial was continued, and the parties were directed to

develop facts relating to the alleged S corporation status of

Edgenics before addressing the issue as to whether Edgenics

realized losses and if so what losses may be allocable to

petitioner.

     On May 22, 2007, an evidentiary hearing was held relating to

the S corporation issue.    After the hearing petitioner and

respondent spent a number of months discussing a possible

resolution of this issue.    In the spring of 2008 the parties

notified the Court that the issue could not be resolved

administratively.

     The parties now ask us to decide whether Edgenics in 2000

timely applied to respondent for S corporation status.    The facts

relevant to this issue, as established by the parties’

stipulations and at the May 22, 2007, evidentiary hearing are as

follows.
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     On May 7, 2000, petitioner e-mailed his attorney Stafford W.

Thompson of Red Bank, New Jersey, and asked Mr. Thompson to file

papers necessary to incorporate in Delaware a company by the name

of Edgenics as a C corporation with two named shareholders

(petitioner and Anil Kukreja), with authorization to issue

100,000 shares of stock, and with a corporate address of 4336

Delaware Ave., Kenner, Louisiana.

     On June 2, 2000, a corporation by the name of Edgenics was

incorporated as a Delaware corporation with a corporate address

of 2021 Arch Street, Philadelphia, Pennsylvania, and Edgenics was

authorized to issue 100,000 shares of stock.

     On July 11, 2001, petitioner’s attorney mailed a letter on

behalf of Edgenics and petitioner seeking authorization for

Edgenics to be licensed to do business in New Jersey.   In the

July 11, 2001, letter petitioner’s attorney states that

Edgenics’s “Employee Federal I.D. No. [will be forwarded] when it

is received.”   Included with the July 11, 2001, letter was an

application signed by petitioner and also dated July 11, 2001,

for Edgenics to do business in New Jersey.   On the application

Edgenics’s Federal I.D. number is expressly asked for, but no

number is provided.

     On July 16, 2001, petitioner’s attorney faxed to respondent

on behalf of Edgenics a Form SS-4, Application for Employer

Identification Number, signed by petitioner and dated July 11,
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2001.   The form indicates that Edgenics was a “regular C

corporation”.   On the July 16, 2001, fax cover sheet petitioner’s

attorney requests that respondent “Please issue a Federal

Identification Number as soon as possible.”

     In respondent’s records the above July 11, 2001, Form SS-4

is the first entry or record involving Edgenics.   In July 2001,

respondent issued to Edgenics E.I. No. XX-XXXXXXX.    In July 2001

Edgenics amended its articles of incorporation to increase the

number of authorized shares of stock from 100,000 to 10 million.

     In September 2001 Edgenics filed with respondent a Form

1120, U.S. Corporation Income Tax Return, for 2000.   The return

for 2000 shows petitioner as owner of 65 percent of Edgenics’s

common stock.

     In July 2002 Edgenics filed with respondent a Form 1120 for

2001.   The return for 2001 shows petitioner as owner of 97

percent of Edgenics’s common stock.

     Respondent’s records do not reflect that Edgenics ever filed

with respondent a Form 2553 to apply for S corporation status or

that respondent ever processed or received a Form 2553 on behalf

of Edgenics.

     Petitioners timely filed with respondent their 2002

individual joint Federal income tax return.   Upon audit

respondent determined among other adjustments that petitioners
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failed to report as taxable income the $304,889 petitioner

received from his IRA.


                              OPINION

     Generally, a taxpayer bears the burden to prove timely

filing of an election to be treated as an S corporation.    Rule

142(a); Smith v. Commissioner, T.C. Memo. 1994-270, affd. without

published opinion 81 F.3d 170 (9th Cir. 1996).

     Generally, for an S corporation election to be valid for a

year there must have been filed on behalf of the corporation

(that meets certain requirements not relevant here) a Form 2553,

on or before the 15th day of the third month of the year for

which S corporation status is sought.   Sec. 1362(a) and (b);

secs. 1.1362-1(a), 1.1362-6(a), Income Tax Regs.   The Form 2553

is to be signed by all shareholders of the corporation.    Once a

corporation qualifies as an S corporation, its taxable status

continues unless the corporation revokes its S election.   Sec.

1362(d).

     Before enactment of the Small Business Job Protection Act of

1996 (SBJPA), Pub. L. 104-188, 110 Stat. 1755, late S elections

were invalid for all years.   See Horchem v. Commissioner, T.C.

Memo. 1980-209.   Since enactment of the SBJPA, if a corporation

files late a Form 2553 otherwise free of defect, the S election

will be valid beginning for the year following the year in which

the late election is filed.   Sec. 1362(b)(2) and (3); sec.
                              - 7 -

1.1362-6(a)(2)(ii), Income Tax Regs.   Section 1362(b)(2) and (3),

as amended by SBJPA sec. 1305, 110 Stat. 1779, is effective for

1983 and thereafter.

     Under section 1362(b)(5) and (f), as amended in 1996,

respondent may exercise discretion to treat as valid S elections

that are untimely, that have not been filed, or that

inadvertently omit some shareholder consents or other requested

information, effective for 1983 and thereafter.

     Petitioner asserts that in June of 2000 he personally

obtained Edgenics’s E.I. number over the telephone from

respondent’s local New Jersey office, added the E.I. number to a

Form 2553, and on June 30, 2000, signed the Form 2553 as

president and shareholder of Edgenics and mailed it to respondent

on behalf of Edgenics.

     However, the Form 2553 that petitioner placed in evidence

shows an employer identification number for Edgenics of

XX-XXXXXXX and petitioner as owning 6.5 million shares of

Edgenics stock, suggesting that the Form 2553 was not prepared in

2000, but at the earliest in the summer of 2001.   Respondent’s

records indicate that Edgenics’s E.I. No. XX-XXXXXXX was not

issued until July 27, 2001, and Edgenics was not authorized to

issue more than 100,000 shares of stock until July 2001.

     Respondent’s records show no evidence that a Form 2553 on

behalf of Edgenics was ever processed or received.
                               - 8 -

     In 2000 petitioner had hired an attorney to handle the

incorporation of Edgenics and likely would have had the attorney

call respondent’s office to obtain an E.I. number and file the

Form 2553 with respondent.   Nothing in petitioner’s attorney’s

file, which is in evidence, corroborates that a Form 2553 was

ever mailed to respondent on behalf of Edgenics.

     Petitioner alleges that he filed Edgenics’s 2000 and 2001

corporation Federal income tax returns as though Edgenics were a

C corporation only because Edgenics had not yet received an

answer from respondent with regard to Edgenics’s application for

S corporation status.

     Petitioner offered into evidence two documents which

petitioner alleges were attached to Edgenics’s 2000 and 2001

corporation Federal income tax returns and which state

essentially as follows:


     Edgenics has not received a determination regarding its
     Sub-Chapter S status. However, we understand that we
     cannot file a 1120S unless we have received a S
     determination from IRS. There is also the outstanding
     issue concerning our status as a non-profit. Since we
     need to file a return, we are submitting this 1120
     return as we await a determination from IRS concerning
     our S election.


     Respondent has no record of having received the above

documents with Edgenics’s filed 2000 and 2001 tax returns.

     Even considering the above statements allegedly associated

with Edgenics’s 2000 and 2001 tax returns, petitioners offered no
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persuasive, credible proof of timely mailing by petitioner or by

petitioner’s attorney of a Form 2553 on behalf of Edgenics, and

respondent has no record of a Form 2553 ever having been filed on

behalf of Edgenics.

     On the evidence before us, we reject petitioners’ claim that

a Form 2553 was filed with respondent on behalf of Edgenics in

June 2000, or at any other time, and petitioners make no credible

argument that they had reasonable cause for the failure to do so.

Edgenics does not qualify as an S corporation for 2002.

     To reflect the foregoing, this case will be restored to the

general docket for trial or other disposition of the remaining

issues.


                                        An appropriate order will

                                   be issued.
