Failure to use S corporation correctly results in self-employment tax.

AuthorBeavers, James A.

The Tax Court held that the income earned by a financial adviser was his income, not the income of his wholly owned S corporation, and he was subject to self-employment tax on the income.

Background

Ryan Fleischer is a registered financial consultant, Certified Financial Planner, and licensed seller of variable health and life insurance policies who develops investment portfolios for clients. He initially provided services as an employee of an investment firm and then as an employee of a bank. Wanting to have his own clients and accounts, for whom he could provide varying investment opportunities, he decided to start his own business.

On Feb. 2, 2006, to provide services on his own, Fleischer signed an agreement with LPL, a brokerage company. The agreement expressly states that Fleischer is an independent contractor with respect to LPL, and he signed the agreement in his personal capacity.

On Feb. 7, 2006, Fleisher incorporated Fleischer Wealth Plan (FWP) and elected S corporation status for the company. Fleischer is the sole shareholder of FWP and holds the positions of president, secretary, and treasurer. On Feb. 28, he entered into an employment agreement with FWP under which the company pays him a salary to "perform duties in the capacity of Financial Advisor."

In addition, on March 13, 2008, Fleischer entered into a broker contract with MassMutual Financial Group (MassMutual).The contract is between Fleischer and MassMutual, with no mention of FWP in the contract, and Fleischer signed the contract in his personal capacity. The contract explicitly states that there is no employer-employee relationship between Fleischer and MassMutual.

Through the end of the tax years in question, Fleischer and the companies had not modified the terms of the contracts.

On each of his income tax returns for 2009 to 2011, Fleischer reported wage income paid to him by FWP and the ordinary income of FWP (as calculated on FWP's Form 1120S, U.S. Income Tax Return for an S Corporation, and reported to Fleischer on a Schedule K-l, Shareholder's Share of Income, Deductions, Credits, etc., from the company) as nonpassive income on Schedule E, Supplemental Income and Loss. Fleischer did not report any self-employment tax on the returns.

The IRS issued Fleischer a notice of deficiency for the years 2009 to 2011. It determined that for the entire period, FWP's income was actually self-employment income to him that he should have reported each year on a Schedule C...

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