Question: Corporate Formation Steve and Betty Crespi are married and have a gifted son, David, aged 13. While Steve was an engineer, he started Crespi Creations in 2010 as the proprietor. Through Crespi Creations, Steve bought, refurnished and resold vintage furniture from flea markets for a profit. David, fascinated with the computer since an early age, used an online legal service, and easily and on his own, incorporated Crespi Creations in 2010. One day, the corporation paperwork arrived in the mail and Steve was furious when he learned what his young son, David, did. Steve had no idea and clearly did not give David permission or authority to do that. David freely offered an impish apology. Steve, though, did not undo the corporation but instead filed corporate annual reports with his home state. In the ensuing years, the Crespiâ€TMs bought old and vintage furniture to refinish at a profit although they incurred losses in the first two years. They used their personal credit cards and checking accounts for Crespi Creationsâ€TM business expenses and to deposit income earned.
They never kept any records for Crespi Creations. Steve and Betty prepared and filed Forms 1040 U.S. Individual Income Tax Returns, for 2010 and 2011 in addition to a Schedule C, Profit or Loss From Business that identified the principal business of Crespi Creations as “Refinsih Furniture.†The Crespiâ€TMs reported Schedule C losses of $21,513 for 2010 and $14,066 for 2011. They reported many business expenses but did not keep any logs for any of the expenses. They did retain their credit card statements however. The IRS examined the 2010 and 2011 tax returns of the Crespiâ€TMs and issued a notice of deficiency. The IRS removed the Schedule C amounts (losses) and adjusted the tax liability, asserting that Crespi Creations was a corporation not a sole proprietorship able to use a Schedule C. The Crespiâ€TMs quickly contacted you to understand the issues. Prepare a memo addressed to Steve and Betty Crespi to explain whether the Crespiâ€TMs were allowed to deduct the Crespi Creations expenses on their personal income tax return.
First, state the issue. Provide a brief statement of facts, a discussion of the factors and end with a conclusion.