Taxation - Income - Deductions - Law practice.

Byline: R.I. Lawyers Weekly Staff

Where the IRS disallowed deductions on an attorney's individual tax return, that decision should be upheld, as there is no clear evidence that he operated a law practice separate from an "S" corporation.

Background

"Defendant, 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.

"Mr. 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. ... Mr. Morowitz was the sole shareholder of that corporation at the time of incorporation. 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. All income and expenses of the corporation were reported on the Form 1120S until 2009 when Mr. Morowitz brought in a new shareholder. ... At that time, Mr. Morowitz changed the name of the corporation to Morowitz & Barry, Ltd. ... 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 Number ('EIN'). ... Instead, the corporation continued to operate under its amended name throughout the 2010 income tax year.

"In 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. ... 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.

"... Mr. Morowitz concedes that, when the corporation amended its name, the pre-existing 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 individually.

"On his 2010 individual income tax return, however, Mr. Morowitz tiled a Schedule C (Form I 040) claiming deductions for expenses relating to those pre-existing cases...