Taxpayer not a shareholder of not-for-profit corporation.

A taxpayer who was the president and one of the directors of a state law not-for-profit corporation was not a shareholder in the corporation and could not claim passthrough losses from it as an S corporation shareholder.

Background

Waterfront Fashion Week Inc. (Waterfront) was organized under the Kentucky Nonprofit Corporation Acts as a nonstock, not-for-profit corporation in 2012. The organization was created to put on an event called "Waterfront Fashion Week" (the event) to raise funds to benefit the Waterfront Development Corp., a not-for-profit organization that maintains the Louisville Waterfront Park in Louisville, Ky. The primary individual behind Waterfront was Clinton Deckard, who was its president and one of its three directors.

The event ended up losing money, and Waterfront never made a donation to the Waterfront Development Corp. Because insufficient funds had been raised by an event organizer hired by Waterfront to put on the event, Deckard had assumed complete control over the event and contributed $275,000 to Waterfront (over 85% of its operating costs). Deckard claimed, when he took over control of Waterfront, that he gave up plans to obtain federal tax-exempt status for it and began treating it as a for-profit business he owned.

In 2013, the Kentucky secretary of state administratively dissolved Waterfront for failure to file its 2013 annual report, but it was reinstated as a corporation after a reinstatement application was filed. It was again administratively dissolved for failure to file an annual report in 2014 and was not reinstated after that. Nonetheless, in October 2014, Waterfront made an election to be an S corporation retroactive to the date of its incorporation in 2012. Deckard signed the election form and signed the form's shareholder consent statement that indicated he held a 100% ownership interest in Waterfront.

In 2015, Waterfront filed Forms 1120S, U.S. Income Tax Return for an S Corporation, for its tax years 2012 and 2013, reporting operating losses of $277,967 and $3,239 for 2012 and 2013, respectively. Attached to the Forms 1120S were Schedules K-1, Shareholder's Share of Income, Deductions, Credits, etc., reporting that Deckard had 100% stock ownership of Waterfront during 2012 and 2013. Later in 2015, Deckard filed Forms 1040, U.S. Individual Income Tax Return, for his tax years 2012 and 2013. He reported passthrough, nonpassive losses from Waterfront of $277,967 and $3,239 for tax years 2012 and...