In the case of Caselli v. Commissioner, T.C. Memo. 2018-81, a taxpayer wanted to claim a tax credit related to an S corporation in which he had an interest. Unfortunately, the S corporation in question had not made the election to claim the credit in lieu of a full deduction for payroll taxes on its tax return.

The credit in question is found at IRC §45B related to employer social security taxes paid with respect to employee cash tips. Under IRC §45B(c), a taxpayer claiming this credit must reduce the deduction for taxes paid by the taxes for which the credit is given. Under IRC §45B(d) a taxpayer may elect not to claim the credit for a taxable year, thus preserving the deduction for such tips.

Mr. Caselli was one of three shareholders of Apple Gilroy, Inc. (AGI), an S corporation with multiple restaurants. The Court describes AGI’s 2006 and 2007 income tax returns as follows:

AGI filed its 2006 and 2007 Forms 1120S, U.S. Income Tax Return for an S Corporation, on September 14, 2007, and August 22, 2008, respectively. It did not claim any FICA tip credits for either year on its Form 1120S or file Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. Instead, it deducted its payments of the FICA tip taxes on its Forms 1120S. AGI never filed an amended Form 1120S for either year.

While Mr. Caselli originally reported the income and deduction on the return shown on the K-1, after the IRS had issued a notice of deficiency and petitioned the Tax Court for the years of 2006 and 2007 he decided to amend his returns to claim the tip credit under IRC §45B. The IRS disallowed these changes to the returns in question.

The Tax Court notes that since AGI had not filed any amended returns, the taxpayer was essentially asking the Court to rule that AGI could file such an amended return to claim the credits. The Court noted that normally it would refuse to rule on such an issue, but since not much case law exists on IRC §45B the Court would look a bit deeper.

First, the Court found that the failure to claim the IRC §45B credit on the S corporation tax return amounted to an election under IRC §45B(d) not to claim the credit.

Section 45B© explicitly provides that “[n]o deduction shall be allowed under this chapter for any amount taken into account in determining the credit under this section.” Section 45B(d), titled “Election Not to Claim Credit”, further provides that “[t]his section shall not apply to a taxpayer for any taxable year if such taxpayer elects to have this section not apply for such taxable year.” In combination, these two provisions suggest that when AGI chose to deduct its FICA tax payments, it had made an election not to claim any FICA tip credits. Indeed, AGI never claimed, or intended to claim, FICA tip credits for 2006 or 2007. Consequently, on the basis of AGI’s reporting position, petitioner is not entitled to any flowthrough FICA tip credits for either year.

But can the shareholder unilaterally decide at a later date to “undo” that election? The Court looks at which entity makes this election, looking at IRC §45B. The Court found:

Section 45B(c) explicitly provides that “[n]o deduction shall be allowed under this chapter for any amount taken into account in determining the credit under this section.” Section 45B(d), titled “Election Not to Claim Credit”, further provides that “[t]his section shall not apply to a taxpayer for any taxable year if such taxpayer elects to have this section not apply for such taxable year.” In combination, these two provisions suggest that when AGI chose to deduct its FICA tax payments, it had made an election not to claim any FICA tip credits. Indeed, AGI never claimed, or intended to claim, FICA tip credits for 2006 or 2007. Consequently, on the basis of AGI's reporting position, petitioner is not entitled to any flowthrough FICA tip credits for either year.

The Court then refuses to allow the individual shareholder to override that choice made at the entity level:

Petitioner is essentially asking us to create a new precedent, which will endow each individual shareholder with the power to change an S corporation’s tax election unilaterally. Such a unilateral change, if allowed, would not only affect the tax liabilities of the requesting shareholder but could also affect the tax liabilities of the shareholders who have not consented to such a change. Petitioner himself highlighted the danger of this approach by assuring us that “[a]ny change to AGI’s tax items for the years 2006 and 2007 will not have any effect” on other AGI shareholders because of their special circumstances and by attempting to persuade us that there is no unfairness in this particular case. We decline to create a new precedent.