Tax Tips
| Publication year | 1982 |
| Pages | 69 |
1982, January, Pg. 69. Tax Tips
In Keller v. Commissioner(fn1) the Tax Court considered for the first time(fn2) the validity of a one-man professional corporation acting as a partner. Partnerships composed of professional corporations may be formed to avoid conflicts between members with respect to such matters as fringe benefits, retirement plans and distribution versus accumulation of income policies.(fn3) For example, the deferral of a larger portion of current income through the use of qualified corporate retirement plans(fn4) may be less appealing to younger firm members who need their current earnings to maintain their accustomed or desired lifestyle. Additionally, when the partners' ages differ significantly, the type of qualified plan most beneficial to one is not necessarily the best plan for another.
The formation of a partnership composed of both individuals and professional corporations has been an attractive solution despite recent legislation which has greatly reduced the benefits obtainable.(fn5) Prior to Keller, these "paper octopuses"(fn6) were formed with very little guidance(fn7) as to whether the corporate structure would be recognized and, if recognized, whether the income would be taxed to the corporation or the "true earner."(fn8)
In Keller, the Tax Court was presented with an elaborately arranged business entity(fn9) through which eleven pathologists conducted their practice. At issue was whether Dr. Keller's share of partnership income was taxable to him individually or to his wholly owned professional corporation.
Prior to incorporation, Dr. Keller was a member of a medical partnership and also owned shares of an incorporated service organization which performed the partners' laboratory and technical support functions. The corporation owned all of the laboratory equipment, held the lease on the partners' offices, and employed all the medical personnel other than the doctor-partners. The partnership compensated the service organization for lab tests and the services it rendered and, in turn, the service organization paid the individual doctors for supervising its personnel. The partnership performed
the actual medical functions, was responsible for billing and collections, and fulfilled the partnerships' service agreements with various hospitals.
Upon its formation, Dr. Keller's professional corporation was immediately substituted for him in the medical partnership and, after a little more than a year, it took over Dr. Keller's supervisory role with the service organization. Initially, Dr. Keller performed the supervisory functions in his individual capacity.
IRC § 482 allows the IRS to reallocate income between commonly controlled businesses in order to prevent evasion of taxes or clearly to reflect income. The Tax Court analyzed the Keller transaction under § 482, noting that two separate trades or businesses existed---the doctor who was in the business of providing services as an employee(fn10) and his professional corporation. In order to avoid a reallocation of income between taxpayer and his corporation under § 482, the taxpayer...
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