Second Circuit affirms tax after taxpayer claimed 50% S corporation ownership
Karen Veeraswamy v. Commissioner, No. 25-102-cv, BL 40680. 2nd Cir., Court Opinion.
The Second Circuit upheld a Tax Court ruling that taxed a taxpayer on half of an S corporation’s 2014 income because she repeatedly asserted she owned 50% of the company in related bankruptcy proceedings and failed to prove she gave up that interest.
Holding
The Court upheld the Tax Court’s conclusions that in 2014, Karen Veeraswamy owned half of Ashand Enterprises. It also confirmed that bankruptcy documents did not prevent the IRS from contesting ownership, that the IRS’s income calculations were justified and unchallenged, that Rule 155 cannot be used to revisit deductions, and that penalties under §6651(a) and §6654 were applicable because she failed to demonstrate reasonable cause or an applicable statutory exception.
Why It Matters
Taxpayers can constrain themselves by taking sworn positions in other forums. Bankruptcy filings and claims can become key evidence in later tax litigation.
Bankruptcy plan language that describes ownership does not automatically bind the IRS. Preclusion requires issues that were actually litigated and decided, or a final merits judgment on the issue.
A notice of deficiency generally carries a presumption of correctness. A taxpayer still needs evidence to rebut the IRS’s income and deduction computations.
Rule 155 is a math phase, not a second trial. It cannot reopen deductions or introduce new issues after the Court has decided them.
Late-filing and late-payment penalties under §6651(a) are hard to avoid without concrete proof of reasonable cause.
Timeline
2000: Corporate minutes show Karen and Velappan Veeraswamy each held 50% of Ashand.
2004: The couple began living separately. Karen testified that she continued to participate in management thereafter.
2010: Ashand Forms 1120S and Schedules K-1 submitted in bankruptcy reflected Karen as a 50% owner.
2013 to 2015: Ashand's bankruptcy proceeded. Plan materials referenced Velappan as “sole owner,” but the final decree disclaimed settling equity-holder payment issues.
2019 to 2021: In bankruptcy disputes, Karen repeatedly stated she was a “50%” equity shareholder and sought distributions.
January 10, 2025: Tax Court sustained a 2014 deficiency and penalties.
February 9, 2026: Second Circuit affirmed.
Key Facts
Ashand Enterprises was an S corporation, meaning the corporation’s income flows through to shareholders, who report their pro rata shares on their own returns.
The IRS asserted Ashand had capital gains and rental income in 2014 and treated Karen as a 50% shareholder for that year.
Karen argued she was not an owner in 2014 and said Ashand’s and Velappan’s bankruptcy proceedings established Velappan as the sole owner.
She also argued that collateral estoppel and equitable estoppel barred the IRS from asserting she owned part of Ashand.
The Tax Court found she remained a 50% owner in 2014 and upheld penalties for failure to file, failure to pay, and underpayment.
Statutory or Regulatory Framework
§61 defines gross income, including gains from property dealings and rents.
§1366(c) requires a shareholder’s gross income to include the shareholder’s pro rata share of an S corporation’s gross income when determining that shareholder’s gross income.
§6651(a) imposes additions to tax for failure to file and failure to pay unless the taxpayer shows reasonable cause and no willful neglect.
§6654 imposes an addition to tax for underpayment of estimated tax, with limited exceptions, including unusual circumstances under §6654(e)(3)(A).
Tax Court Rule 155 governs post-opinion computations. Rule 155(c) limits that phase to computations consistent with the court’s findings and bars new issues or relitigation.
Arguments
Taxpayer argued:
She was not the owner of Ashand in 2014.
Ashand’s bankruptcy proceedings established Velappan as the sole owner, so claim preclusion or issue preclusion barred the IRS from asserting she was an owner.
The Tax Court misstated or miscomputed her income and should have reduced it with additional expenses or deductions.
The Tax Court should have accepted her Rule 155 computation.
Penalties under §6651(a) and §6654 should not apply.
Government argued:
She was a 50% shareholder in 2014, according to corporate records, K-1s, and her own sworn statements in bankruptcy filings.
Bankruptcy proceedings did not actually litigate and decide ownership, and final bankruptcy documents did not resolve equity-holder disputes.
The deficiency determination had a rational basis tied to her asserted shareholder status and her receipt of bankruptcy estate funds.
She failed to substantiate additional deductions at trial and could not reopen them in Rule 155.
She did not show reasonable cause to avoid penalties.
Court’s Reasoning
The Court treated ownership as a factual finding, subject to clear-error review, and found none.
Corporate minutes and later K-1s demonstrated that she held a 50% ownership interest well before 2014.
She did not produce evidence showing she abandoned her interest before 2014.
Her own later bankruptcy statements were powerful admissions. She repeatedly claimed she was a 50% equity shareholder and sought escrow funds and distributions on that basis, including under penalty of perjury.
Preclusion failed because ownership was not actually litigated and decided in Ashand’s bankruptcy, and the final decree expressly disclaimed settling equity-holder payment issues.
The IRS’s deficiency had a rational basis because it relied on her own representations and related bankruptcy recoveries tied to those representations.
She did not rebut the IRS’s calculations at trial and did not substantiate alternative computations.
The Tax Court properly rejected her Rule 155 submission because it tried to relitigate deductions after the Court had already ruled on allowable expenses.
Penalty relief failed because she did not show reasonable cause for failing to file or pay. She testified that she spoke with an accountant, but she did not claim that the accountant told her she did not need to file.
She also did not establish grounds for an exception to §6654. She did not argue or prove casualty, disaster, or unusual circumstances that made penalties inequitable.
Forward-Looking Implications
Practitioners should treat bankruptcy pleadings, proofs of claim, and turnover disputes as evidentiary landmines in later tax disputes, especially when they contain ownership assertions.
If a taxpayer’s position depends on abandonment or transfer of an equity interest, they need documentation and a clean timeline. Courts will not infer abandonment without proof.
Bankruptcy plan descriptions can be loose. If the order and final decree do not determine ownership, they will usually not support issue preclusion.
Substantiation still wins. If deductions are the real fight, the record must be built at trial, not in post-opinion filings.
Rule 155 should be approached as an arithmetic implementation, not a strategy for reopening factual disputes.
Result
The Second Circuit affirmed the Tax Court’s order sustaining the 2014 deficiency and imposing additions to tax for failure to file, failure to pay, and underpayment.
The Takeaway
If you tell a bankruptcy Court you own 50% of a company to get paid, expect the IRS to treat you like a 50% owner when the company earns income. Courts will not let you rewrite that story later without real evidence.
List of Citations
26 U.S.C. §61(a)(3), (5). Includes capital gains and rents in gross income.
26 U.S.C. §1366(c). Requires S corporation shareholders to include pro rata share of S corporation gross income.
26 U.S.C. §6651(a). Failure-to-file and failure-to-pay additions to tax, subject to reasonable cause exception.
26 U.S.C. §6654 and §6654(e)(3)(A). Estimated tax underpayment addition and a limited exception for unusual circumstances.
Tax Court Rule 155(c). Bars relitigation and new issues during the computation phase.
Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017). Standard of review for Tax Court decisions.
Schaffer v. Commissioner, 779 F.2d 849 (2d Cir. 1985). Presumption of correctness for deficiency notices.
Llorente v. Commissioner, 649 F.2d 152 (2d Cir. 1981). Limits on presumption where deficiency lacks a rational basis.
Chimblo v. Commissioner, 177 F.3d 119 (2d Cir. 1999). Abuse of discretion review for Rule 155 computations.
Allen v. McCurry, 449 U.S. 90 (1980). Claim preclusion requires a final merits judgment.
Boguslavsky v. Kaplan, 159 F.3d 715 (2d Cir. 1998). Issue preclusion requires actual litigation and a decision.
Arizona v. California, 530 U.S. 392 (2000). Settlements typically lack issue-preclusive effect absent a clear intent.
Marrin v. Commissioner, 147 F.3d 147 (2d Cir. 1998). Reasonable cause framework for §6651.
26 C.F.R. §301.6651-1(c)(1). Defines reasonable cause as ordinary business care and prudence.