Where a deduction for a payment (such as for services) is denied on audit, a single amount may be taxed more than once. Taxpayers in such situations may seek a correlative adjustment to the tax treatment of the payment by the recipient so as to avoid or mitigate duplicative income inclusions. Unfortunately, such correlative adjustments are commonly denied when the change in the payor's tax treatment does not clearly justify a change in treatment of the payee. In FAB Holdings v. Commissioner (TC Memo 2021-135), circumstances indicated an attempt to obtain more favorable tax treatment through a tax-motivated structure, and the petitioners were unable to obtain any correlative adjustment. The decision underscores the potential for such structures to backfire.

Facts

FAB Holdings, LLC (FAB), a limited liability company that had elected to be taxed as a corporation, was one of three petitioners before the Tax Court in this recent memorandum decision. The owners of FAB from the time of its formation in 2010 through 2013 (the years at issue) were Frank and Dana Berritto. Ms. Berritto died in 2015, and the other two petitioners were her estate and Mr. Berritto, who worked in the financial industry. He started work for Merrill Lynch in 2010 and continued to work there for the other years at issue.