The ‘What is Mine is Yours’ Case

http://ustaxcourt.gov/InOpHistoric/WalkerMemo.TCM.WPD.pdf

The taxpayer followed the advice of an attorney and organized his dental practice as an LLC with himself, the only generator or revenue, as a 1% owner and another LLC as 99% owner. The 2nd LLC was owned by the taxpayer’s children. In this manner the taxpayer sought to take advantage of the children’s lower tax rates and avoid self-employment taxes.

Take aways:

• Under the assignment of income doctrine, taxpayers may not shift their tax liability by merely assigning income that the taxpayer earned to someone else

• Business entities must have economic substance other than the avoidance of taxes. The 2nd LLC did nothing other than own the 1st LLC which creates a problem.

• If the children were able to perform some service for the business the taxpayer could have employed them and they would have been exempt from FICA charges so some income would have legally transferred to them – of course not hundreds of thousands of dollars of income….