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Hargis v. Koskinen

United States Court of Appeals, Eighth Circuit

June 22, 2018

Bobby R. Hargis; Brenda J. Hargis Petitioners
v.
John Koskinen, Commissioner of Internal Revenue Respondent

          Submitted: April 11, 2018

          Appeal from The United States Tax Court

          Before BENTON, MELLOY, and GRASZ, Circuit Judges.

          BENTON, CIRCUIT JUDGE.

         Bobby R. and Brenda J. Hargis petitioned the Tax Court[1] for redetermination of a tax deficiency. The Tax Court upheld the determination of the Commissioner of Internal Revenue. The Hargises appeal. Having jurisdiction under section 7482(a)(1), [2] this court affirms.

         I.

         From 2007 to 2010, the Hargises bought and operated nursing homes. Bobby was the sole owner of corporations that operated the homes (the Operating Corporations). They were S corporations under section 1362(a). Brenda owned interests in companies that bought and leased the homes to the Operating Corporations (the Nursing Home LLCs). The Nursing Home LLCs were partnerships under 26 C.F.R. § 301.7701-3(a). All the entities had net operating losses, which the Hargises deducted on their joint tax returns for the years 2009 and 2010.

         The Commissioner issued the Hargises a notice of deficiency for 2009 and 2010. The Commissioner disallowed deduction of most of the nursing home losses, due to the Hargises' insufficient basis in their companies. As a result, the Hargises owed $281, 766 more for 2009 and 2010, combined.

         The Hargises claim that each had greater basis in their companies. The Tax Court ruled for the Commissioner. This court reviews "the tax court's fact findings for clear error and its legal conclusions de novo." Bean v. Commissioner, 268 F.3d 553, 556 (8th Cir. 2001).

         II.

         Bobby's Operating Corporations-as S corporations-are "passthrough" for tax purposes, meaning their income and losses generally pass through to the shareholders. See § 1366. "[H]owever, S corporation losses may only be deducted to the extent a shareholder has basis in the corporation." Bergman v. United States, 174 F.3d 928, 931 (8th Cir. 1999), citing § 1366(d). "This limitation prevents a shareholder from deducting more than he has invested in the corporation." Id. "The aggregate amount of losses and deductions taken into account by a shareholder . . . shall not exceed the sum of":

(A) the adjusted basis of the shareholder's stock in the S corporation . . . and
(B) the shareholder's adjusted basis of any indebtedness of the S corporation to ...

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