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S Corp Realized Barter Income Equal to Roofing Services It Received
Patrick C. Badell, et ux., et al. v. Commissioner
The Tax Court has determined that an S corporation realized barter income for roofing services that a shareholder of the corporation received in 1995.
Patrick Badell and Ronald Wilson are the sole shareholders of Badell and Wilson, P.C. (B&W), an S corporation. B&W provided legal services for W.R. Kelso Co., and Kelso constructed a roof on the Badell’s residence in B&W’s fiscal year 1995. Kelso also performed roof work on B&W’s office building from 1994 to 1999. On its 1994 return, Kelso reporter $49,000 of income based on the legal services it received in lieu of payment it billed to B&W for the roof construction. Kelso credited its accounts payable to B&W in the same amount. B&W did not try to collect from Kelso for the legal services it provided or report the roofing services it received as income.
In July 1996, an IRS agent began examining B&W’s returns. The agent also examined the returns of B&W’s shareholders and met with William Kelso in October 1996 to discuss the roofing job. At that meeting, Kelso told the agent that B&W intended to “work off” the cost of the roofing job. After the audit of B&W began, Kelso began trying to collect the amount owed from B&W. B&W paid Kelso in 1997 and 1998 for the work done on the Badell’s residence and on B&W’s office building. Kelso also began paying B&W for the legal services shortly after its meeting with the IRS agent.
Tax Court Judge John O. Colvin held that B&W received $49,000 of barter income in its 1995 fiscal year, finding that the parties treated the roofing transaction as a barter. Judge Colvin noted that although both Kelso and B&W billed each other for their services, neither attempted to collect those amounts until after the IRS agent began the audit. Also, Judge Colvin observed, the parties did not pay each other in full until several years after providing the roofing job and legal services.
Judge Colvin also held that B&W could not deduct advances it made to clients for filing fees and similar costs as business expenses, finding that those advances were nondeductible loans. Finally, Judge Colvin determined that Badell and Wilson were liable for the accuracy-related penalty for negligence for the tax years in question.
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