News & Articles


10 / 12 / 2018

Rubin v. United States, 122 A.F.T.R.2d 2018-5979 (9th Cir. 9-24-2018)

In a significant decision, the 9th Circuit Court of Appeals has ruled that the sole shareholder of a S corporation put forth an adequate statement of inconsistency when filing an amended tax return.

The 9th Circuit took a look at the amended tax returns filed by subchapter S corporation's sole shareholder to determine if they adequately identified inconsistencies with the S corporation’s previously filed tax returns, as required for shareholder to seek tax refund based on allegedly inaccurate reporting positions taken in corporation's returns.

The Government contended that the shareholder only identified how his amended returns were different from his original returns, and failed to show how his amended returns were different from corporate returns.  However, the shareholder provided two-page pro-forma Schedule K-1 accompanied by two-page statement explaining inconsistencies between return actually filed on corporation's behalf and pro forma return prepared by shareholder’s accountant.  The Internal Revenue Service (IRS) rejected shareholder's claims on merits.

At issue was a S corporation, Focus Media, Inc. (“Focus”).  It was wholly owned by Rubin.  For many years, all required tax returns at both the corporate and shareholder level were filed on a consistent basis, and Rubin paid all required income taxes during the relevant time period. In other words, Rubin’s tax returns consistently reflected the flow-through income and losses reported on Focus’s returns.

By the year 2000, Focus was in serious financial difficulties. It engaged in advertising placement, but some of its largest customers became concerned about its possible misuse of funds and sued the company to prevent additional disbursements.

Focus was eventually enjoined from collecting its unpaid receivables. Later that year, creditors put Focus into involuntary bankruptcy.

What happens then is that a bankruptcy trustee was appointed and advised the bankruptcy court that Focus’s receivables were worthless. At that point, the trustee that has taken over is the one filing the S corporation tax return.  The trustee filed Focus’s 2000 tax return.

When the K-1 is issued, Rubin argues that the trustee incorrectly accounted for $66,696,211 of cancellation of indebtedness income and $23,110,349 of bad debts expenses that Focus was entitled to write off.

Rubin filed his personal tax return and paid his taxes based on the income reported in the Focus return filed by the trustee for tax year 2000. But, he later files an amended personal income tax return for that year, however, and also for the two preceding years, 1998 and 1999. He includes in his filing a statement that described how his income flowed from Focus and stated his disagreement with the tax return filed for Focus by the bankruptcy trustee. He attached a pro forma amended tax return for Focus for the 2000 tax year, which reflected the different treatment of bad debt expenses and the cancellation of indebtedness income. He also attaches a pro forma Schedule K-1 showing the income he contended should have been reported to him based on the revised numbers in the pro forma Focus return. 

A Schedule K-1 is the form used by an S corporation to report the shareholder’s share of income, losses, deductions and credits. The claims for refunds in 1998 and 1999 were based on carrying losses back to those years, again based on the revised figures in the pro forma Focus 2000 return. In his amended returns Rubin claimed tax refunds, based on the revised numbers, of $2,564,260 for 1998, $595,218 for 1999, and $6,957,293 for 2000. Rubin also filed an amended return for 2001, but he did not claim any refund for that year.

The IRS attempted at one point to argue that Rubin's refund claims should be rejected because he failed to file an actual IRS Form 8082 to identify the inconsistent positions he was taking with the trustee's S corporation tax return filings and K-1 it had issued.  However, it abandoned the argument, and on appeal, the 9th Circuit duly noted that the pro formas that were filed were sufficient (i.e., amounted to de facto Form 8082s), sufficient for Form 8082 purposes.