United States District Court, D. Rhode Island
J. McConncll, Jr., United States District Judge.
the United States Government ("Government"), filed
a motion for summary judgement on Plaintiff David
Morowitz's ("Mr. Morowitz") claim for recovery
on Internal Revenue Service ("IRS") tax and claim
for recovery on penalties erroneously assessed and collected,
ECF No. 7. Mr. Morowitz filed an objection to the motion for
summary judgement and the Government filed a reply. ECF No.
16. At issue for this Court is whether Mr. Morowitz is
entitled to a reimbursement of the assessment of taxes,
penalties, and fees when the IRS disallowed filed deductions
on his individual tax return.
Morowitz filed articles of incorporation with the Office of
the Rhode Island Secretary of State and incorporated the Law
Office of David Morowitz as an "S" Corporation in
1999. ECF No. 8 at 1. Mr. Morowitz was the sole shareholder
of that corporation at the time of incorporation.
Id. As standard practice for an "S"
Corporation, Mr. Morowitz filed a Form 1120S, U.S. Income Tax
Return for an S Corporation ("Form 1120S"), to
report its taxes. Id. Ail income and expenses of the
corporation were reported on the Form 1120S until 2009 when
Mr. Morowitz brought in a new shareholder. Id. at 2.
At that time, Mr. Morowitz changed the name of the
corporation to Morowitz & Barry, Ltd. Id. When
Mr, Morowitz amended the name of the corporation, he did not
dissolve the original corporation, amend its corporate
structure, or change its Federal Employer Identification No.
("EIN"). Id. Instead, the corporation
continued to operate under its amended name throughout the
2010 income tax year. Id.
conjunction with Mr. Morowitz amending the name of the
corporation, he entered into a Shareholder Agreement (the
"Agreement") with Patrick Barry to whom 50 shares
of stock were issued. ECF No. 13 at 2-3. In that agreement,
Mr. Morowitz and Mr. Barry agreed to segregate "[f]ees
earned and monies paid on Mr. Morowitz's pre-existing
cases," and those fees or monies earned would not belong
to Morowitz & Barry, Ltd. Id. The retainers for
the pre-existing clients, however, were executed through the
Law Office of David Morowitz, Ltd., prior to the Agreement.
ECF No. 12 at 1. Mr. Morowitz concedes that, when the
corporation amended its name, the preexisting clients did not
sign a new retainer agreement with Morowitz & Barry,
Ltd., nor does Mr. Morowitz offer that the pre-existing
clients signed a new retainer agreement with him
2010 individual income tax return, however, Mr. Morowitz
filed a Schedule C (Form 1040) claiming deductions for
expenses relating to those pre-existing cases. ECF No. 8 at
3-4. The deductions include "case costs" in the
amount of $9, 997 and $2, 137, each paid out of the
corporation's bank account. Id. Additionally,
Mr. Morowitz claimed a deduction for $15, 000 that he paid,
out of pocket, to the corporation's legal secretaries for
work performed on a pre-existing case. Id. The IRS
disallowed each of these deductions
STANDARD OF REVIEW
judgment is appropriate where 'the pleadings,
depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there
is no genuine issue as to any material fact and that the
moving party is entitled to judgment as a matter of
law.'" Rivera-Fhres v. Bristol-Myers Squibb
Caribbean, 112 F.3d 9, 13 (1st Cir. 1997) (quoting Fed.
R. Civ. Pro. 56). The substantive law identifies the facts
that are material and "[o]nly disputes over facts that
might affect the outcome of the suit under the governing law
will properly preclude the entry of summary judgment."
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). In a refund action under 26 U.S.C. § 7422(a),
the complaining taxpayer bears the burden of proving that the
challenged IRS tax assessment was erroneous. Webb v.
IRS, 15 F.3d 203, 205 (1st Cir. 1994). As such, the
taxpayer who seeks a refund has the burden of proving: his
right to a deduction; the amount of the deduction; and, as
the nonmoving party, definite and competent evidence to
survive summary judgment. Great N. Nekoosa v. United
States, 711 F.2d 473, 475 (1st Cir. 2009); see
also Webb, 15 F.3d at 205 (citing Bonilla-Aviles
v. Southmark San Juan, Inc., 992 F.2d 391, 393 (1st
Morowitz was Never a Sole Proprietor and not Entitled to Take
Personal Deductions from Payments Associated with the
Morowitz argues that he is entitled to the deductions because
the payments on the preexisting cases were not related to the
corporation but, instead, were from a separate business
operation that he classifies as a sole proprietorship. ECF
No. 12 at 3. In so arguing, Mr. Morowitz identifies the steps
he took to separate this business from the corporation. Mr.
Morowitz states that, though there was no formal dissolution
of his corporation prior to the name change, there was a
withdrawal of all funds, an insertion of new funds, new stock
issued to an additional stockholder, and an additional
officer was added to the corporation. Id. at 4.
However, though Mr. Morowitz claims those fees and monies
belong to him personally, and not the corporation, he admits
that the funds were deposited into, and paid from, the
corporation's IOLTA account. Id. at 7. Further,
Mr. Morowitz admits that that the clients of the pre-existing
cases signed retainer agreements solely with his corporation.
Id. at 1, Essentially, Mr. Morowitz offers that,
"although technically not a new entity for purposes of
registering with the Secretary of State, the intent was the
start of a new firm." /rf. at 11.
Court is mindful of the intentions of Mr. Morowitz. However,
a corporation exists for tax purposes if formed for a
business purpose or if it carries on business after
incorporation. Motive Props. V. Comm'r., 319
U.S. 436, 238-39 (1943). The choice of the advantages of
incorporation to do business require the acceptance of the
tax advantages and disadvantages. Id.; see
Burnet v. Commonwealth Imp. Co., 287 U.S. 415, 419-20
(1932). While a taxpayer is free to organize her business as
she chooses, once having done so, she must accept the tax
consequences of her choice, whether contemplated or not, and
may not enjoy the benefit of some other route she might have
chosen to follow but did not. Comm V v. Nat 7 Alfalfa
Dehydrating & Milling Co., 417 U.S. 134, 149(1974).
Morowitz chose to incorporate the Law Office of David
Morowitz, Ltd., and elected to file with the IRS as an
"S" corporation. ECF No. 8 at 1. "S"
corporations are corporations that elect to pass corporate
income, losses, deductions, and credits through to their
shareholders for federal tax purposes. When the shareholders
of a corporation make a Subchapter S election, they switch
from a multiple-level taxation system to a flow-through
taxation system under which income is subjected to only one
level of taxation. Gitlitz v. Comm'r, 531 U.S.
206, 209 (2001). The corporation's profits and losses
pass through directly to its shareholders on a pro rata basis
and are reported on the shareholders' individual tax
returns allowing "S" Corporations to avoid double
taxation on its corporate income. Id. The IRS
requires "S" Corporations to file a Form 1120S to
report its income, gains, deductions, and credits. S
incorporation, Mr. Morowitz has properly filed a Form 1120S
to report the corporation's income, gains, deductions,
and credits. ECF No. 8 at 2, Mr. Morowitz, in 2009, added a
shareholder, amended the name of the corporation, and
continued to file a Form 1120S Form with the same BIN.
Id. In 2010, however, Mr. Morowitz filed a Schedule
C (Form 1040) claiming deductions from pre-existing case
costs stemming from clients retained through the Law Office
of David Morowitz, Ltd. Id. at 3-4. In filing a
Schedule C (Form 1040), Mr. Morowitz attempted to report
income or loss stemming from a business operated, or a
profession practiced, as a sole proprietor. A sole