Tax Court explains great tax planning in this case.
As you may know from my other blogs, I am a fan of Great Tax Planning. Yet, so many highly educated individuals fall prey of novice tax planners. Take Dr. Wiley Elick and his wife Sharon for example. Dr. Elick is a successful pediatric dentist.
Of course, he wants to save taxes. He was informed of the tax savings of an ESOP (a type of retirement plan funded by your corporation’s stock instead of money).
His medical corporation could not have the ESOP. In many states, only doctors can own the shares of a medical corporation. So, he formed a new corporation. The dental practice paid the new corporation a management fee. The Doctor wanted to move the profit from his dental practice to his management company. The ESOP cost reduced the taxable income of the management company.
Novice tax planners use “management fee” method to shift income. They believe that if they have a written management agreement that a management fee is allowed. They do not know that management service must occur. The tax court looks at the hours of management services.
(Update: recently it (management fee and consulting fee) tax planning went criminal. Here is what happen: Mr. Albert S.N. Hee was a successful businessman Hawaii. His corporation paid family members consulting and management fees for work they never did. His family members paid income tax on the fees. Mr. Hee is going to prison because his corporate tax return was false. Merely showing the management/consulting fee on the return was a crime.)
As in this case, the Judge saw that the new corporation never provided any management services. In other words, the management company did nothing.
It gets worse. The amount of the management fee was decided by Doctor. The fee was not based on hours spent or the value of the services. I have a link to the case below. The fee changed each year. The fee was based on the profit of the dental practice.
Here is a link to the court case.
To have a great tax plan, I suggest working with the IRS National Office. They are pro small business. If Dr. Elick applied for an IRS private letter ruling, the National Office would have perfected his tax plan. The ruling process reviews your plan. If it is not going to work, they IRS will guide you on how to perfect your tax plan. Many people fear getting a ruling will cause a tax audit. None of my clients have had a tax audit because they applied for a ruling. Learn more about our private letter ruling services with this link.
Want to take your tax planning to the next level, then contact me, Brian Dooley, CPA, MBT at [email protected]