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Dennis L. Hayden and Sharon E. Hayden vs. Commissioner of Internal Revenue (CA-7), U.S. Court of Appeals, 7th Circuit, 99-2520, 2/11/2000, 204 F3d 772. FACTS

Plaintiffs, Dennis and Sharon Hayden, married, were sole partners of the proprietorship called "Leddos Frozen Yogurt, LLC." In 1994, Leddos purchased equipment for $26,650 and on the tax return for 1994 tax year reported an income loss of $2,224, with total deduction for $13,294 and a loss of $15,718, Under section 179, on the Depreciation and Amortization form, Leddos reported the expense of $17,500 as deduction of the $26,650 invested in equipment. The Haydens reported this figure as a flow through to their 1994 federal income tax return.

During that same period, Dennis Hayden operated an accounting business as sole owner (Hayden & Associates, CPAs). Dennis Hayden paid the Hayden's 1993 income tax liability of $9,284 from the bank account...

On the Hayden's joint 1994 income tax return, they added the $9,284 of the previous year and deducted $17,630 as "pay roll" taxes for the accounting business.
On November 26, 1997, the Commissioner of Internal Revenue determined that he Hayden's owned a deficiency of income tax to the amount of $3,784, plus $292,60 for the 1994 tax year. The Commissioner also overruled the $17,500 that had been claimed under section 179 deduction as well as the $9,284 claimed as "payroll taxes' on the 1993 personal income tax return. An accuracy-related penalty was added, and the Haydens filed a petition with the Tax Court contesting the deficiency as regards the section 179 deductions and the accuracy-related penalty.

The Tax Court had upheld the ruling of the Commissioner and resulting penalty, so the Hoydens now directed their appeal…

Sources used in this document:
1. Leddos did not have any income for 1994 and section 179(b)(3)(A) maintains that the deduction under section 179 "shall not exceed the aggregate amount of taxable income of the taxpayer of any trade or business during such taxable year." Section 179 (c) (2) states similarly, but that section uses the terms 'partnership' which the Haydens, referring to section 701, is a term that is different from, and therefore does not refer to taxpayer. They therefore argued that the regulation is invalid.

2. Relying on precedents, the U.S. Court concurred with the Tax Court that the implicit meaning of 'partnership' in this case was the same as 'taxpayer'; that Sec. 1.179-2©(2) was valid and they therefore maintained that it must be sustained.

3. Section 179 has conditions one of which is that the deduction must not exceed the taxpayer's combined amount of taxable income. Leddos had no taxable income for 1994. Rather, they reported a loss of $15,718. Their claimed deduction under Section 179 of $17,500 exceeded their taxable income of that year, and, therefore, the Tax Court was correct in denying their request.
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