November 17, 2005
Raby & Raby on Substance vs. Form: The Taxpayer Catch-22
The tax war pitting substance against form has had many great battles, including a few that are raging in 2005 and of which we will speak later, but the one we remember most clearly is what can be labeled as the "Professional Corporation Confrontation." The taxpayers were licensed professionals prohibited by state law from using business corporations to practice their professions. The tax result was that they were denied the retirement plan benefits available to corporate employees. Medical professionals led the professional corporation charge against those state laws. The tax practice community thought the doctors had achieved a final victory, although it turned out to be only an early skirmish, when the appeals court took a substance-over-form approach and recognized the Western Montana Clinic, a partnership under state law, as a corporation for federal income tax purposes in United States v. Kintner, 216 F.2d 418 (9th Cir. 1954).
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