Sloane Spartan is a personal injury trial lawyer focusing on major (expected damages in excess of $2M)personal injury cases with a twenty-year career and a thriving practice in Tampa. A great part of Sloane’ssuccess is her rigorous preparation for trials including a full mock trial in advance of every trial. For the pastten years Sloane has done her mock trials in a full-sized courtroom located in her Tampa office.Sloane was considering efficiency when evaluating a new office at the expiration of a lease back in 2020.Sloane noted that the full-sized courtroom was only in use about four weeks a year and sat idle 48 weeks ayear.About the same time as Sloane was considering her office lease a number of fellow trial attorneys approachedSloane about developing a shared courtroom facility to be owned by a newly formed LLC. Sloane was intriguedby the idea since the 1,500 square foot courtroom cost her nearly $60,000 a year in office rent at current rates.Courtroom Prep Center, LLC (pass-thru entity)(the LLC) was formed. Sloane paid $200,000 to acquire her 20%interest in the LLC. Four other lawyers and a local law school owned varying percentages of the LLC. The LLCconstructed a building on land not far from the Courthouse; the facility was operated by a professional staff.The LLC offered courtroom preparation, deposition, arbitration and mediation services and rooms for lawyers,insurance companies and training organizations to prepare for dispute resolution. In a typical year the LLC wasprofitable and Sloane’s average share of the income was $50,000. Sloane was not active in the daily operationof the LLC but she did participate in periodic board meetings and she used the facility as a customer on aregular basis paying the same price as other customers for use of the facility. She pays about $30,000 in feesannually to use the facility. Sloane was thrilled with the investment since she now had a profit ($50,000 in hershare of LLC income less the fees she paid to the LLC of $30,000) of $20,000 net on the LLC instead of“throwing money away on rent” for her prior rental space courtroom.Sloane’s accountant, ABC CPAs classified the income from the LLC as non-passive and combined the incomefrom the LLC with the active income from Sloane’s law practice. Sloane also had passive losses averaging$75,000 each year from unrelated rental property investments from a citrus grove and an apartment buildingreported on her tax return. Those passive losses were carried forward each year as Sloane had nothing tooffset against those rental property losses (she took no passive loss deduction).Sloane changed accounting firms and her new firm (XYZ CPAs) asked why the income from the LLC wasclassified as non-passive and combined in with her law practice (active income) on her tax returns. XYZsuggested that the LLC income should have been used to offset the passive losses from the rental property.XYZ also noted that self-employment tax should not have been paid in connection with the LLC income since itshould have been classified as a passive activity all along.Sloane agreed to amend her last three years of tax returns to re-classify the income from the LLC as passive,seek a refund of the overpaid self-employment tax on the LLC income and seek a refund of income taxoffsetting the LLC income with passive losses from her other rental property investments.The IRS denied the refund request. Sloane sued the IRS in US District Court for the Middle District of Floridaseeking the refund. What would be the result of the lawsuit? (i dont need a long answer just a breif explanation that incorporates tax law)
Sloane Spartan is a personal injury trial lawyer focusing on major (expected damages in excess of $2M)
personal injury cases with a twenty-year career and a thriving practice in Tampa. A great part of Sloane’s
success is her rigorous preparation for trials including a full mock trial in advance of every trial. For the past
ten years Sloane has done her mock trials in a full-sized courtroom located in her Tampa office.
Sloane was considering efficiency when evaluating a new office at the expiration of a lease back in 2020.
Sloane noted that the full-sized courtroom was only in use about four weeks a year and sat idle 48 weeks a
year.
About the same time as Sloane was considering her office lease a number of fellow trial attorneys approached
Sloane about developing a shared courtroom facility to be owned by a newly formed LLC. Sloane was intrigued
by the idea since the 1,500 square foot courtroom cost her nearly $60,000 a year in office rent at current rates.
Courtroom Prep Center, LLC (pass-thru entity)(the LLC) was formed. Sloane paid $200,000 to acquire her 20%
interest in the LLC. Four other lawyers and a local law school owned varying percentages of the LLC. The LLC
constructed a building on land not far from the Courthouse; the facility was operated by a professional staff.
The LLC offered courtroom preparation, deposition, arbitration and mediation services and rooms for lawyers,
insurance companies and training organizations to prepare for dispute resolution. In a typical year the LLC was
profitable and Sloane’s average share of the income was $50,000. Sloane was not active in the daily operation
of the LLC but she did participate in periodic board meetings and she used the facility as a customer on a
regular basis paying the same price as other customers for use of the facility. She pays about $30,000 in fees
annually to use the facility. Sloane was thrilled with the investment since she now had a profit ($50,000 in her
share of LLC income less the fees she paid to the LLC of $30,000) of $20,000 net on the LLC instead of
“throwing money away on rent” for her prior rental space courtroom.
Sloane’s accountant, ABC CPAs classified the income from the LLC as non-passive and combined the income
from the LLC with the active income from Sloane’s law practice. Sloane also had passive losses averaging
$75,000 each year from unrelated rental property investments from a citrus grove and an apartment building
reported on her tax return. Those passive losses were carried forward each year as Sloane had nothing to
offset against those rental property losses (she took no passive loss deduction).
Sloane changed accounting firms and her new firm (XYZ CPAs) asked why the income from the LLC was
classified as non-passive and combined in with her law practice (active income) on her tax returns. XYZ
suggested that the LLC income should have been used to offset the passive losses from the rental property.
XYZ also noted that self-employment tax should not have been paid in connection with the LLC income since it
should have been classified as a passive activity all along.
Sloane agreed to amend her last three years of tax returns to re-classify the income from the LLC as passive,
seek a refund of the overpaid self-employment tax on the LLC income and seek a refund of income tax
offsetting the LLC income with passive losses from her other rental property investments.
The IRS denied the refund request. Sloane sued the IRS in US District Court for the Middle District of Florida
seeking the refund.
What would be the result of the lawsuit?
(i dont need a long answer just a breif explanation that incorporates tax law)
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