Corporate Formation Steve and Betty Crespi are married and havea gifted son, David, aged 13. While Steve was an engineer, hestarted Crespi Creations in 2010 as the proprietor. Through CrespiCreations, Steve bought, refurnished and resold vintage furniturefrom flea markets for a profit. David, fascinated with the computersince an early age, used an online legal service, and easily and onhis own, incorporated Crespi Creations in 2010. One day, thecorporation paperwork arrived in the mail and Steve was furiouswhen he learned what his young son, David, did. Steve had no ideaand clearly did not give David permission or authority to do that.David freely offered an impish apology. Steve, though, did not undothe corporation but instead filed corporate annual reports with hishome state. In the ensuing years, the Crespi’s bought old andvintage furniture to refinish at a profit although they incurredlosses in the first two years. They used their personal creditcards and checking accounts for Crespi Creations’ business expensesand to deposit income earned. They never kept any records forCrespi Creations. Steve and Betty prepared and filed Forms 1040U.S. Individual Income Tax Returns, for 2010 and 2011 in additionto a Schedule C, Profit or Loss From Business that identified theprincipal business of Crespi Creations as “Refinsih Furniture.” TheCrespi’s reported Schedule C losses of $21,513 for 2010 and $14,066for 2011. They reported many business expenses but did not keep anylogs for any of the expenses. They did retain their credit cardstatements however. The IRS examined the 2010 and 2011 tax returnsof the Crespi’s and issued a notice of deficiency. The IRS removedthe Schedule C amounts (losses) and adjusted the tax liability,asserting that Crespi Creations was a corporation not a soleproprietorship able to use a Schedule C. The Crespi’s quicklycontacted you to understand the issues. Prepare a memo addressed toSteve and Betty Crespi to explain whether the Crespi’s were allowedto deduct the Crespi Creations expenses on their personal incometax return.
First, state the issue. Provide a brief statement of facts, adiscussion of the factors and end with a conclusion.
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