In Uncategorized on 04/12/2017 at 16:47

Section 1402(a)(13) entered the IRC before LLCs were more than an oddity, and PLLCs were undreamt of. The PC (or professional corporation) was the newest gimmick way back then.

So even battle-hardened 40-year CPAs could think that everything after guaranteed payments were exempt from SE by dint of said statute, which exempted from SE limited partners’ distributions above guaranteed payments.


Vincent J. Castigliola and Marie Castigliola, 2017 T. C. Memo. 62, filed 4/12/17, teaches us that, though you may be a member of a Professional Limited Liability Company, you are not limited if you exercise command and control.

Vince and his fellow members John and Harry have command and control over their law practice, which switched from a partnership to a PLLC. Of course, there was no written operating agreement. Not that Mississippi law requires a written, or even an oral, operating agreement. I hasten to add I am not licensed to practice law in MS, so this observation is strictly casual and is under no circumstances to be taken as legal advice. But my experience is that relations at partner level are most often on a handshake.

I joined one law firm as a partner on a six-page, one-year agreement that we never looked at the whole time I was there. If you need an overlawyered, hundred-page deal with those to whom you entrust your professional life, fortune and sacred honor, don’t do the deal.

Well, Vince and fellow members run the whole show.

So Judge Paris, scampering as usual to ordinary language when a statutory term is undefined, finds Vince and fellow members aren’t limited partners.

“The PLLC had no written operating agreement, nor is there any evidence to show that any member’s management power was limited in any way.  Furthermore, all members participated in control of the PLLC:  For example, they all participated in collectively making decisions regarding their distributive shares, borrowing money, hiring, firing, and rate of pay for employees.  They each supervised associate attorneys and signed checks for the PLLC.  On the basis of the foregoing facts, the respective interests held by [Vince, John and Harry] could not have been limited partnership interests under any of the limited partnership acts.  Therefore, they were not limited partners under section 1402(a)(13).” 2017 T. C. Memo. 62, at p. 12.

But the deficiencies for SE are under the five-and-ten, and they relied on their trusty 40-year CPA, so no chops.

IRS claims that $15K sitting in their escrow account was undistributed income. That’s a total nonstarter, as Vince, John and Harry collected payments from uninsured tortfeasors for the benefit of a major insurer, and twice yearly sent what they collected to said insurer. But they didn’t know to whom the $15K belonged.

Judge Paris: “[John testifies credibly] that the funds in the trust account were not PLLC funds and could not be withdrawn as fees by the members.  He was not sure to which clients the funds belonged but was certain that it would be a violation of professional ethics to withdraw the money as fees (the consequences of which might have included disbarment).  He was not sure how the discrepancy arose but stated that it may have been attributable to losing the PLLC’s office in Hurricane Katrina.  He also stated that at some point the money might be deposited into Mississippi’s fund for unclaimed moneys.  [John’s] testimony was corroborated by the credible testimony of [Vince].

“The members testified credibly that the funds respondent identified do not belong to the members.  Rule 1.15 of the Mississippi Rules of Professional Conduct requires that a lawyer keep client funds–and funds the ownership of which is disputed–separate from the lawyer’s own property.  Petitioners argue that, because the members know they do not own these funds, the funds must be kept separate in the trust account.  Respondent has offered no evidence or arguments to support his contention that the members are entitled to withdraw these funds as fees.  The Court therefore finds that the funds in the trust account do not belong to them.  Consequently, the funds remaining in the PLLC’s trust account are not income to petitioners for 2010.” 2017 T. C. Memo. 62, at pp. 14-15.

Before too readily scoffing at IRS’ counsel (“they obviously never practiced law outside the government”), I am told (but do not know of my own knowledge) that malefactors in our profession played games with escrow accounts. And my unfamiliarity with MS escheat law forbids my asking why unclaimed funds were not deposited with the appropriate governmental authority.


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