Friday, September 6, 2013
Following up on this morning's post, Schwidetzky: The 'John Edwards S Corp Tax Shelter': Is the IRS Winning the Battles But Losing the War?: Tax Update Blog: The IRS is Losing the S Corporation Comp War?, by Joe Kristan:
Mr. Schwidetzky, an academic, seems to think taxpayers are just having their way with the poor IRS, but for those of us in the wild trying to keep our clients out of trouble without wasting their money on excessive taxes, it hardly looks like the IRS is losing.
First, the IRS is auditing S corporations aggressively — way too aggressively. Mr. Schidetzky fails to bring up the recent Glass Blocks case, where the Tax Court ruled that a struggling one-man S corporation had to pay a “reasonable salary” even [if] doing so throws the corporation into a loss. That’s a result far worse than the poor guy would have had filing as a Schedule C taxpayer. It’s hard to see how such pointless and harsh treatment is good policy.
Second, there is still no clear statutory or regulatory guidance to determine minimum “reasonable” salaries. ...
Third, why is this just an S corporation issue? The same thing can come up in C corporations. Think of Warren Buffett’s famous $100,000 annual salary — one that is arguably tens of millions “too low.” Why not hit him for more payroll taxes? The same problem can also arise in an LLC with multiple classes of ownership interests in a partnership return.
The “problem,” such as it is, comes from the tax statutes that exempt some business income from self-employment tax, and from the IRS failure to provide clear guidance to either examiners or taxpayers — not from the courts’ attempts to prevent taxpayer abuse.
Update: Walter Schwidetzky responds:
Mr Kristan’s response mostly misses the point of my op-ed. Payroll taxes should be due on the entire amount earned from services. The answer should not vary based on the business form used (as it is currently argued it does). There is no statute that requires that result; the cases I discussed could have, and in my view should have, been decided differently. While the John Edwards technique is never used with C corps to my knowledge, I have no problem concluding that Mr. Buffet’s formal salary is less than his actual earnings. There is one item on which Mr. Kristan and I agree. The IRS has failed to provide clear guidance, a failure I find inexplicable.