We have a tale of two Sub S Corps today, one from Judge Paris and one from Judge Kerrigan.
Judge Paris leads off with Ryan M. Fleischer, 2016 T. C. Memo. 238, filed 12/29/16. Ryan’s an investment seller, and he creates a sub S called FWP. Ryan “…was the sole shareholder and the president, secretary, and treasurer of FWP.” Ryan also entered into an employment agreement with FWP a couple weeks (Happy New Year, Judge Holmes) after he incorporated FWP.
But before getting thus employed, Ryan enters into a deal with a financial services company to act as IC salesman. Personally. And a couple of weeks after entering the employ of FWP, Ryan makes a deal with Mass Mutual. Again personally, no mention of FWP.
Ryan filed returns for FWP, showing earnings from the financial services outfit and Mass Mutual, gave himself a salary but paid no SE (although he did claim self-employed health insurance).
IRS says the deals were with Ryan, not FWP, and Ryan should have filed a Schedule C for the whole shebang. And he owes SE.
We all know income is taxable to the one who earned it. But with corporations and other such entities, it’s not so simple.
Judge Paris: “Because it is impractical to apply a simplistic ‘who earned the income’ test when the Court’s choices are a corporation and its service-provider employee, the question has evolved to one of ‘who controls the earning of the income.’ For a corporation, not its service-provider employee, to be the controller of the income, two elements must be found: (1) the individual providing the services must be an employee of the corporation whom the corporation can direct and control in a meaningful sense…; and (2) ‘there must exist between the corporation and the person or entity using the services a contract or similar indicium recognizing the corporation’s controlling position’…. These elements can be found in the employment tax regulations. Sec. 31.3121(d)-1(c)(2), Employment Tax Regs. (‘Accordingly, within Regulation § 31.3121(d)-1(c)(2), two necessary elements must be met before the corporation * * * may be considered the true controller of the service-provider.’), Because both elements must be met before the corporation will be considered to control the service-provider employee and because the Court finds that there is no contract or other indicium that FWP exhibited control over petitioner, the Court will discuss only the second element.” 2016 T. C. Memo. 238, at p. 11. (Citations omitted).
As a well-known on-line chess commentator says “And we can stop here.”
But Ryan didn’t. He says FWP wasn’t licensed as he is (and he has a World Series of licenses), and it would cost millions for FWP to get them.
So what, says Judge Paris. Ryan’s deals were all made by him alone, with no mention of FWP. You still can’t assign income that you earned to someone or something that didn’t. And FWP being duly incorporated doesn’t change that FWP didn’t earn income.
Next is Judge Kerrigan, dealing with an alleged $1.88 million in TFRPs owed by Sam T. Jewell, 2016 T. C. Memo. 239, filed 12/2916.
Sam is another Sub S specialist, but this time all the properties and everything else is properly titled to his Sub Ss, scattered all over the OK landscape.
IRS hits Sam with a bunch of NFTLs. Sam wants a CDP, but his only claim is that IRS filed liens against him where he did not own property.
Now we all know the one-CDP-per-liability rule.
“Section 6320(b)(2) imposes a qualification on subsection (b)(1) by providing: ‘A person shall be entitled to only one hearing under this section with respect to the taxable period to which the unpaid tax specified in subsection (a)(3)(A) relates.’” 2016 T. C. Memo. 239, at p. 9.
The first NFTL was filed in TX. Sam had notice, but didn’t file a 12153 on that, so he has no chance to contest liability on the rest.
But is there abuse of discretion in filing a bunch of liens?
IRS wants record rule: only the administrative record is subject to review. Judge Kerrigan blows that off.
Judge Kerrigan: “The Court has previously held that it is not required to apply a limited standard of review and may accept evidence outside the administrative record in CDP cases. See Robinette v. Commissioner, 123 T.C. 85,101 (2004), rev’d, 439 F.3d 455 (8th Cir. 2006); see also Murphy v. Commissioner, 125 T.C. at 313. The broad scope of review in Robinette is not controlling in the First, Eighth, and Ninth Circuits. See Dalton v. Commissioner, 682 F.3d 149 (1st Cir. 2012), rev’g 135 T.C. 393 (2010); Keller v. Commissioner, 568 F.3d 710, 718 (9th Cir. 2009), aff’g in part as to this issue T.C. Memo. 2006 166; Robinette v. Commissioner, 439 F.3d 455.” 2016 T. C. Memo. 239, at p. 12. I cite the cases so you can put them in your next memo of law.
But Sam’s from OK, OK is in Tenth Circuit, Tenth Circuit hasn’t ruled, the 2015 change in Section 7482(b)(1)(G) came after Sam’s petition and plays no part here, so Judge Kerrigan lets it all hang in.
Once again, arbitrary lines on a map decide issues of national import.
But once it all goes in, it doesn’t matter.
“Pursuant to section 301.6320-1(b)(1) and (2), Proced. & Admin. Regs., petitioner is entitled to a hearing with respect to the first NFTL that is filed regarding the unpaid tax for a particular period. Section 6320 does not address explicitly whether the right to an administrative hearing and judicial review is tied to the first filed NFTL. Where a statute is ambiguous or silent, we look to the legislative history to determine congressional intent.” 2016 T. C. Memo. 239, at p. 15.
The Conf. Report says Appeals can consider only NFTL One. And TX beat the OK barrage by one hour, CST.
So what, says Sam, I didn’t own no property in TX neither.
Judge Paris isn’t impressed: “During the administrative proceeding, in response to the settlement officer’s questions as to what property petitioner owned and where it was, including questions as to possible ‘nominee property, alter ego property or any other co-mingled [sic] property’, petitioner responded that the settlement officer was raising a ‘new issue’. Hence, petitioner relies solely upon his lack of record title to any property, real or personal, in Garvin County, because he owned property in that county through his wholly owned S corporation.
“Petitioner is the sole shareholder of numerous S corporations which operate nursing home facilities throughout Oklahoma, including the nursing home facility business which petitioner and his S corporation…operate in Garvin County. We conclude that it was not an abuse of discretion for respondent to sustain the Garvin County NFTL. That NFTL was filed to protect the Government’s interests because petitioner operates a nursing home facility in that county through his S corporation.” 2016 T. C. Memo. 239, at p. 18.
And Sam’s representative at the hearing dodged whether Sam’s S Corp was a nominee or alter ego, both of which OK State law recognizes.
Sam claims the NFTLs wound up in the local paper and devastated his finances, but has no proof.
One strike and you’re out, Sam.