Corporate Formation

Steve and BettyCrespiare married and have a gifted son, David, aged 13. While Steve was an engineer, he startedCrespiCreations in 2010 as the proprietor. ThroughCrespiCreations, Steve bought, refurnished and resold vintage furniture from flea markets for a profit.

David, fascinated with the computer since an early age, used anonlinelegal service, and easily and on his own, incorporatedCrespiCreations in 2010. One day, the corporation paperwork arrived in the mail and Steve was furious when he learned what his young son, David, did. Steve had no idea and clearly did not give David permission or authority to do that. David freely offered an impish apology. Steve, though, did not undo the corporation but instead filed corporate annual reports with his home state.

In the ensuing years, theCrespisbought old and vintage furniture to refinish at a profit although they incurred losses in the first two years. They used their personal credit cards and checking accounts forCrespiCreations business expenses and to deposit income earned. They never kept any records forCrespiCreations.

Steve and Betty prepared and filed Forms 1040 U.S. Individual Income Tax Returns, for 2010 and 2011 in addition to a Schedule C, Profit or Loss From Business that identified the principal business ofCrespiCreations as RefinsihFurniture. TheCrespisreported Schedule C losses of $21,513 for 2010 and $14,066 for 2011. They reported many business expenses but did not keep any logs for any of the expenses. They did retain their credit card statements however.

The IRS examined the 2010 and 2011 tax returns of theCrespisand issued a notice of deficiency. The IRS removed the Schedule C amounts (losses) and adjusted the tax liability, asserting thatCrespiCreations was a corporation not a sole proprietorship able to use a Schedule C.

TheCrespisquickly contacted you to understand the issues. Prepare a memo addressed to Steve and BettyCrespito explain whether theCrespiswere allowed to deduct theCrespiCreations expenses on their personal income tax return. You may consult the following cases.

Moline Properties., Inc. v. Commissioner, 319 U.S. 436, 438 (1943)

Rochlaniv. Commissioner, T.C. Memo. 2015-174

Your memo should be fully developed, use logical reasoning, grammar and punctuation. First, state the issue. Provide a brief statement of facts, a discussion of the factors and end with a conclusion.

Sample Memorandum Format

Memorandum

To:

From:

Re:

Date:

Issue

Statement of Facts

Discussion

Conclusion