Judge Wherry, less modest than Judge Nega, designates his Sub S employee case, even though he’s just dropping a petitioner and amending a caption, in Patricia Arroyo DDS, Corp., Alex Mansilla, and Mercedes P. Arroyo, Docket No. 5874-15, filed 2/23/17.
The facts are almost foursquare with my blogpost “You Said It,” 7/21/17.
IRS hit Alex and Mercedes with passthrough employment taxes for the wage shortfalls from their sub S.
“During the examination of DDS Corp.’s returns, respondent determined that the salaries paid to petitioners as employees were artificially low and proposed new salaries based on nationwide market information. Based on these increased salaries, respondent determined that DDS Corp. had a deficiency in employment taxes….” Order, at pp. 2-3.
So my surmise in my abovecaptioned blogpost looks good. IRS is hunting the low-wage high-profit sub S dodge, when professional services are in the mix.
Alex and Mercedes want Tax Court to decide the correct payscales for their sub S.
“In the petition, petitioners assert that the salaries paid by DDS Corp. during the years at issue were appropriate given the company’s circumstances, and they contend that the Court has jurisdiction over their dispute as to the amount of employment tax owed by DDS Corp….” Order, at p. 3.
Nope, says Judge Wherry.
The Section 7436 is for reclassification, but there was nobody to reclassify. DDS Corp always treated Alex and Mercedes as employees.
Obviously, if they were ICs, whatever they got would be subject to SE, so there’d be no point to creating a sub S. For the dodge to work, the sub S shareholders would have to be paid wages (subject to FICA-FUTA) and profits (not subject to FICA-FUTA), and fiddle the mix.
So DDS Corp is out as petitioner, as the employment tax hit is a passthrough, and the caption is amended accordingly. As Mercedes listed herself as an officer in State filings, Judge Wherry judicially notices her sua sponte as a statutory employee.
Of course, to the extent there are deficiencies for Alex and Mercedes, they’re still in.
