Citations
- 63 F.3d 614
Full opinion text
POSNER, Chief Judge.
Subchapter S of the Internal Revenue Code entitles certain corporations to elect to be taxed almost (though not quite: see 26 U.S.C. § 1371(a)(1), and compare 26 U.S.C. § 731 with 26 U.S.C. § 311(b)) as if they were partnerships. The Subehapter S corporation’s profits and losses flow through to the shareholders and are reported on their individual income tax returns, 26 U.S.C. § 1366, thus avoiding double taxation of corporate earnings. The election, however, requires the consent of all persons who are shareholders on the date of the election, 26 U.S.C. § 1362(a)(2), which in the case of Cabintaxi Corporation was November 11, 1983. An extension of time for making the election is possible if the original election failed because a shareholder had not consented, Treas.Reg. § 1.1362-6(b)(3)(iii) (superseding Treas.Reg. § 1.1372-3(c), which was in force back in 1983); Kean v. Commissioner, 469 F.2d 1183, 1188-89 (9th Cir.1972), but Cabintaxi did not get around to asking for the extension until 1995. The Internal Revenue Service refused to grant it, both because of the eleven-year delay in asking for it and because in the interim Cabintaxi had acquired foreign shareholders, making it ineligible for Subehapter S status. 26 U.S.C. § 1361(b)(1)(C). This would not matter if— this is the first issue in the case — Cabintaxi acquired that status back in 1983, for it had no foreign shareholders either then or, later, when it incurred the losses that it seeks to pass through to its shareholders. The validity of the denial of the requested extension is not before us.
The Tax Court, finding the requirement of unanimous consent not satisfied, refused to allow Cabintaxi to pass through to its four shareholders the $17,000 loss that it sustained in 1984 and the $19,000 loss that it sustained the following year. Only one of the four had signed the consent form by the election date. Nor would the court allow Cabintaxi to deduct these losses on its own income tax return, because the court found that Cabintaxi had not been engaged in a trade or business during those two years. 68 T.C.M. (CCH) 49, 1994 WL 327740 (T.C. 1994). Cabintaxi challenges both rulings, although the second is germane only if the first is upheld — and even if it is, might appear to be moot because Cabintaxi has never had a profit from which to deduct a loss. Business losses can be carried forward for up to 15 years, however. 26 U.S.C. § 172(b)(l)(A)(ii). So the possibility of Cabintaxi’s deducting losses that it incurred in 1984 and 1985 will not expire until 1999 and 2000, and Cabintaxi may have some profits by then from which to deduct the losses, or be able to use the losses in a merger. 26 U.S.C. § 381(a), (c)(1).
The facts relating to the Subchapter S election are simple and uncontested. On August 13, 1983, Cabintaxi had just one shareholder, its founder Lamkin, who owned 5,000 shares, and two directors, Lamkin and the corporation’s “tax matters person,” petitioner Edler. (A “tax matters person,” the Sub-chapter S corporation’s counterpart to a partnership’s “tax matters partner,” 26 U.S.C. § 6231(a)(7), represents the corporation in its dealings with the Internal Revenue Service. See Temp.Treas.Reg. § 301.6224(c)-2T(b)(3) (1987).) The board of directors was enlarged two days later by the addition of two individuals who (along -with Lamkin and Edler) wanted to invest in Ca-bintaxi. The new board voted to issue 145,-000 additional shares of stock, at a price of 10