Arthur B. And Eleanor L. Clemens v. Commissioner of Internal Revenue

This case involves federal income tax for the years 1961, 1962, and 1963. Taxpayers filed a petition in the United States Tax Court for redetermination of deficiencies asserted against them by the Commissioner. The Tax Court rendered decision in favor of the Commissioner and this appeal followed.

Three questions are presented:

1. Whether taxpayers, as stockholders of a purported subchapter S corporation, were entitled to deduct their proportionate shares of the corporation’s operating losses. The Tax Court held that they could not, since the corporation’s subchapter S election was invalid. The invalidity of the asserted election resulted because of the failure of some of the stockholders to consent. Int.Rev. Code of 1954 § 1372(a), 26 U.S.C. § 1372 (a). The shareholders of record (with one exception) were married and their stock constituted community property ; their wives, however, had not consented to the subchapter S election, as required by Treas.Reg. [26 C.F.R.] § 1.-1372-3(a) pursuant to § 1372(c) (1) of the Code, 26 U.S.C. § 1372 (c) (l).

2. Whether taxpayers could deduct unrepaid advances made to the corporation as business expenses or losses or as nonbusiness losses…