Passive Activities And Other Oxymorons

Mulcahy, Pauritsch, Salvador and Co., LTD. I’ve wavered on whether to give this one the entire treatment. It really is getting a little stale and it was producing a good bit of schadenfreude on my part, that i find unseemly. The greater I consider it, though, the more important it seems. The firm is an accounting and talking to firm with its principal place of business in Orland Park, Illinois.

The firm was founded in 1979 by Edward W. Mulcahy, Michael F. Pauritsch, and Philip A. Salvador. We refer to the three men as the founders collectively. Through the entire full years in issue-2001, 2002, and 2003-the founders served as the firm’s board of directors and sole officers. The founders also served as the only people of the firm’s compensation committee, which driven what the company paid its employees, officials, and board members. The firm was a C corporation and a cash-basis taxpayer; it used a calendar year for its taxable 12 months.

  • Roth IRA contributions
  • Provide feedback to let employees know how they are doing
  • Log into the account
  • Ways to Pay

At issue is the deductibility of obligations the firm designed to three related entities: Financial Alternatives, Inc. (Financial Alternatives), PEM and Associates (PEM), and MPS Limited (MPS Ltd.). The sole shareholders of Financial Alternatives were the founders (Mulcahy, Pauritsch, and Salvador). The founders owned Financial Alternatives in equal shares. Year finishing June 30 Financial Alternatives was a C corporation which used a taxable. It filed Forms 1120, U.S.

The calendar year end difference hints that there was some sort of deferral game happening, Year C company MPS was a calendar. To be able to not need corporate tax they might experienced to have paid salaries in December. A June season end that they no out in June By instead paying another corp with, they defer income for a season. Conceivably they could have classified “Financial Alternatives” as other than an individual service corporation which would allow these to take benefit of graduated corporate rates.

That seems a little unlikely. It is interesting to note, however, that the big guys possessed 78% of MPS. Had they possessed more than 80%, the two corporations, MPS and “Financial Alternatives”, would have been part of the controlled group. The founders also possessed PEM in equivalent shares. PEM was an over-all partnership. It submitted Forms 1065, U.S.

Mulcahy and Salvador owned MPS Ltd. Pauritsch was not an owner. MPS Ltd. was a limited liability company filing as a C company. MPS Ltd wouldn’t normally have been part of a controlled group with either of the other two C companies, again because of Vogel Fertilizer once. The situation doesn’t reveal the actual big guys were up to. The deferral is pretty obvious and perhaps multiple use of corporate and business graduated rates. Of course it isn’t inconceivable that these were carrying it out all simply for the hell of it.

Whatever, these were trying to perform, though, It is thought by me turned out never to be worth it. The IRS disallowed the deductions for fees paid to the three other entities. The IRS argument was that the entities didn’t do anything for MPS. The defense compared to that is that MPS was really paying for the task that the big guys did. Therefore, the IRS argues, the “consulting fee” payments should be tested for deductibility as payments for the related entities’ services-as against payments for the founders’ services. We need not reach this matter because, even if the obligations are tested for deductibility as payments for the founders’ services, the firm failed to show that the payments are deductible.

Evaluating the payments as though they were payments for the founders’ services, we find that the firm has didn’t show that it is eligible for the deductions. The IRS discussion is simple. The entities didn’t perform any services. Only the IRS can claim “substance over form”. The taxpayer surely got to choose the proper execution and is trapped with it.

You can’t now say that the payments were really to the big guys, themselves, than the entities rather. It looks like the Court is neither agreeing or disagreeing with that position. Instead it says that no matter because the payments have never been established to be reasonable compensation to the best guys.