Taxing Lessons From Court Decisions

Decisions — Sharing the credit

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You may be amazed by what you can accomplish if you don’t care who gets the credit, but that’s probably not the best argument to make in tax court.

In T.C. Memo. 2018-81 (Caselli), the taxpayer was one of three shareholders in a subchapter S corporation that operated multiple restaurants. The corporation was required to collect and remit payroll taxes on customer tips paid to employees by customers.

Food and beverage industry employers can choose to claim a federal income tax credit for the portion of the social security taxes paid on employee tips or take a federal income tax deduction for the payroll taxes paid.

The corporation timely filed federal income tax returns for 2006 and 2007 and did not claim any tip credits for either year, instead choosing to deduct payroll tax payments. The corporation did not file amended returns for either year.

The taxpayer filed his 2006 and 2007 federal individual income tax returns and claimed his share of the corporate income and deductions as reported on the corporate tax forms.

After the IRS sent a notice assessing a deficiency of $203,695 on the taxpayer’s individual 2007 return, the taxpayer filed an amended individual return for that year claiming a refund of $65,526. The claimed refund was the result of tip credits the corporation could have claimed in 2007 had the corporation not chosen to use the deduction.

Later, in response to a separate IRS notice assessing a deficiency of $260,798 for 2006, the taxpayer filed an amended individual return for 2006 that also claimed tip credits.

The IRS disallowed both requests.

The taxpayer agreed that the corporation, by not filing the form to claim the credit and instead taking a deduction for the payroll taxes paid, elected not to claim the tip credit.

Nonetheless, he said that the corporate election could be changed by his request, made in his capacity as a shareholder.

The IRS said that any election regarding the tip credit should be made by the corporation directly, not through a shareholder’s request. According to the IRS, the taxpayer, in his sole capacity as one of corporate shareholders, could not change the corporation’s already-made election of not claiming the tip credit.

The court agreed with the IRS, quoting internal revenue code section 1363(c)(1), which states the general rule that any election affecting the computation of items derived from an S corporation shall be made by the corporation.

Do you think there are any exceptions to this rule?

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.


A credit is a dollar for dollar reduction of the tax you owe.

A deduction reduces your taxable income.

Credits are usually more beneficial than deductions, and you generally cannot claim both a credit and a deduction. In this case, claiming the credit requires the employer to reduce the social security and Medicare tax deduction.

Additionally, the “tip credit” is not refundable. If the credit reduces regular income tax below zero, to a negative amount, the negative amount is not available as a tax refund.

Right answer!

The general rule is subject to two exceptions, namely,

elections under section 617 (relating to deduction and recapture of certain mining exploration expenditures)


elections under section 901 (relating to foreign tax credits)

In this case, the taxpayer and the IRS agreed that the election to claim the tip credit did not fall into either of the statutory exceptions.

Sorry, wrong answer :(
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