The Tax Court disregarded for tax purposes a multilevel-entity structure for a taxpayer's psychiatry practice, holding the tax payer liable for unpaid self-employment taxes on the practice's net income.
Tony Robucci had conducted his practice in Colorado as a sole proprietorship until 2001, when, at his request to minimize his taxes, his attorney-accountant recommended an organizational structure involving an LLC and two corporations. Robucci adopted this arrangement without seeking additional advice. The LLC conducted the practice and had two members, Robucci and a professional corporation. A second corporation was formed to manage the business of the practice but was not involved in patient care. Robucci was the sole shareholder of both corporations. The LLC was 95% owned by Robucci and 5% by the PC as a limited partner. Robucci's 95% ownership interest was further split between an 85% interest as a limited partner and a 10% interest as a general partner. The limited partner ownership percentage purportedly reflected Robucci's capital contribution of intangibles (that is, his goodwill) to the LLC.
However, Robucci made no written assignment of assets from his practice to the LLC, nor did he have an employment agreement with any of the corporations, and none of them had any employees. Neither corporation paid a salary to Robucci nor to anyone else in subsequent years. The LLC deducted "management lees" for each year in question, but didn't specify to whom they were paid or for what services. Furthermore, Robucci continued to bill Medicare and Medicaid as an individual practitioner under his own Social Security number, and the LLC and the corporations maintained the same business address as that of his previous sole proprietorship. The two corporations also did not have separate telephones of websites, nor did they advertise. Robucci's Schedule SE, Self-Employment Tax, on his Form 1040 listed as earnings from self-employment only an amount corresponding to his 10% general partner interest in the LLC.
Upon examination, the IRS argued that the entities lacked legitimate business purposes and were created solely for the purpose of tax avoidance. Robucci argued that one of his corporations performed oversight and management services and that the other corporation managed and tracked expenses. He also...