tag:blogger.com,1999:blog-1519969502186924526.post1741304717945027253..comments2023-10-24T08:00:53.865-05:00Comments on Federal Tax Crimes: Diverting Corporate Earnings - Constructive Dividends or Wages / Salary (9/17/11)Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-1519969502186924526.post-49731109614126793012013-09-23T05:05:54.426-05:002013-09-23T05:05:54.426-05:00Hey there! Keep it up! This is a good read. I will...Hey there! Keep it up! This is a good read. I will be looking forward to visit your page again and for your other posts as well. Thank you for sharing your thoughts about bookkeeping services in your area. Personal Tax services is all the more important for any type of business, be it a big business house or a small venture. <a href="http://www.gdfaccountants.co.uk" rel="nofollow">Personal Tax Darlington</a>Personal Tax Darlingtonnoreply@blogger.comtag:blogger.com,1999:blog-1519969502186924526.post-79582547109172410102013-09-04T15:49:24.416-05:002013-09-04T15:49:24.416-05:00Ahem... This was a Personal Service Corporation w...Ahem... This was a Personal Service Corporation with B Ellefsen as the single shareholder/employee which made him the only income producing capital of the corporation. The corp could not have maintained a functioning tax existence minus the efforts of B Ellefsen. Accordingly, Ellefsen personally brought the income of the corporation into existence by his own hand as there was no other income producing capital (other doctors). Thus, any income/profit produced at the corporate level represent the true earnings of the individual. Reclassification of the mgmt fee at the corp level could only be considered as an additional component of Ellefsen's compensation (deductible by the corp) and impossible to be characterized as a dividend. If people could avoid employment taxes on personally earned income (by calling it a dividend) they would do it. However, a proper reading of IRC Sec. 3121 and Sec. 3101 proves otherwise. <br /><br />The fact that that was a PSC with a single shareholder/employee and not a regular C corporation makes all the difference in the world. You simply cannot avoid employment taxes on personally derived income 100% produced by your efforts. <br /><br />In this case a dividend violates not only the Code but Social Security's entitlement to collect employment taxes as well.wagonwheelnoreply@blogger.comtag:blogger.com,1999:blog-1519969502186924526.post-17490093524876759722011-09-19T05:31:57.877-05:002011-09-19T05:31:57.877-05:00Agreed Jack.
You would expect the prosecution w...Agreed Jack. <br /><br />You would expect the prosecution will put up a "pick your poison" strategy: (i) constructive dividends to taxpayer and false tax return for the corporation and taxpayer or (ii) wages to taxpayer and false tax return for corporation since the recharacterization of "management fees" as compensation is a false entry.<br /><br />What seems to have happened here is that all the prosecution got locked into position (i), which the defense tried to exploit by the tactic of confusing the jury.<br /><br />As a substantive matter though the taxpayer's argument holds no water, though it may have made sense to the defense to try to exploit the error: it had no real defense.<br /><br />Thanks for the comment and response. Always interesting here.<br /><br />PATRICK CARMODYPATRICK CARMODYhttp://www.carrigcounsel.comnoreply@blogger.comtag:blogger.com,1999:blog-1519969502186924526.post-43508212299393367692011-09-18T21:24:56.575-05:002011-09-18T21:24:56.575-05:00Patrick,
Your comments are always good. I spotte...Patrick,<br /><br />Your comments are always good. I spotted that issue but did not chase it down. I just assumed that it made a difference somewhere because the court of appeals and the parties focused on it. The larger point I wanted to address was that, when it is important to skinny down the potential tax at the corporate level, one of the first lines of defense that practitioners think about is to assert that the diversions represent additional compensation. Certainly, there is theoretical force to the argument in a personal service, single practitioner business because the income relates to the personal services and his compensation should be wages (or salaries) rather than dividends. But, generally I think, if the corporation has not actually treated the diversion as compensation, it will not be treated as compensation and the default will be dividend.<br /><br />Now, having said that, the corporate level treatment will be important if the criminal charge is made for the false corporate return or, even if the charge is only at the shareholder level, the corporate tax diverted will be relevant conduct that can affect sentencing. Presumably ex post facto recharacterization of the diversion will not be permitted for that purpose either.<br /><br />Thanks,<br /><br />Jack TownsendJack Townsendhttps://www.blogger.com/profile/14469823736335455874noreply@blogger.comtag:blogger.com,1999:blog-1519969502186924526.post-6262248311980602292011-09-18T20:49:12.450-05:002011-09-18T20:49:12.450-05:00I guess I'm confused.
So what if the taxpay...I guess I'm confused. <br /><br />So what if the taxpayer argued it was wages rather than a constructive dividend. He didn't report the income, whether wages or constructive dividends. For my money it was wages, not that it mattered, if one recharacterize the fake management fees as wages, the easiest path for the prosecution. I couldn't find the DC opinion, but this seems much ado about nothing, in terms of one of the taxpayer's defense. Which seems, by the way, that the IRS was confused about that very issue (wages v. constructive dividend), that suggested uncertainty in application of the law, and therefore he should get off? Now, what planet was his lawyer orbiting? Or perhaps I am missing something? Easy case: fake deductions which should be recharacterized as payment for services that the taxpayer did not report on his 1040?<br /><br />Anyone else take a look at this pretty interesting case, and thank you Jack for bringing it to our attention.PATRICK CARMODYhttp://www.carrigcounsel.comnoreply@blogger.com