Robucci v Commissioner of Internal Revenue is a US Tax Court case (Filed January 24, 2011) that teaches New York taxpayers not to avoid paying self-employment taxes.
The case centers on Medicare social security taxes. The social security tax rate for self-employed taxpayers is 10.4% for 2011 and 2012 and thereafter will be 12.4%. In 2011, social security tax applies to the first $106,800 of net earnings from self-employment. The New York taxpayer uses Form 1040 Schedule SE to calculate the social security tax. The rate for the Medicare tax is 2.9% and applies to all net earnings from self-employment.
Tony L. Robucci was a psychiatrist who operated his practice as a sole proprietorship. He wanted to minimize his tax liabilities. He formed two corporations, after the advice of an attorney who was also a certified public accountant. The two corporations were Robucci PC and Westsphere. Westsphere was considered a business management corporation, uninvolved in patient care. Robucci was the sole shareholder of both corporations. He also formed a limited liability company, Robucci LLC. Robucci PC and Robucci were the two members of Robucci LLC, holding 5% and 95% interests respectively. The LLC paid management fees to Westsphere. Though not normal in a LLC, Robucci’s 95% interest was characterized on the LLC’s tax return as a 10% general partner interest and a 95% limited partnership interest.
Robucci argued a limited understanding of the need for the entities formed and the agreements and other documents drafted by the attorney. He relied on the attorney’s representations that the
actions taken would legitimately result in the tax minimization. After the formation of the entities, he continued to bill some payers of his services, such as Medicare and Medicaid with his own social security number. On Robocci’s tax return, he reported his income attributable to his “limited partner” interest as passive income and did not pay self-employment taxes on the income.
The IRS argued there was no business reason for the two corporations that Robucci formed so the entities should be disregarded for tax purposes. The corporations did not have separate websites or telephone listings, pay rent to Robucci or Robucci LLC, have customers other than Robucci LLC or contracts with any third parties, or advertise. Westsphere did not have dedicated space in Robucci’s office. The IRS considered Robucci deficient in tax payments for several years, and penalized him for the deficiencies.
The US Tax Court agreed with the IRS and held none of the entities affected Robucci’s business. There were no employment or management agreements. All of the income was Robucci’s earnings from self-employment.
For tax planning, contact an experienced New York tax attorney.