On Advice

LPL broker in battle with IRS over how he structures his business

Ruling could have implications for other advisers in independent broker-dealer channel

Oct 30, 2016 @ 12:01 am

By Bruce Kelly

An LPL Financial adviser is in a thorny tax battle with the IRS, and its outcome could have wide implications for financial advisers who own their practices and use a flow-through tax structure known as an “S corporation” to pay themselves.

Called an S Corp in industry shorthand, it elects to pass corporate income, losses, deductions and credits through to shareholders for federal tax purposes, according to the IRS.

Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows the S Corp to avoid double taxation on the corporate income, an all-important aspect of the tax law for advisers who own their businesses, according to the IRS' website.

Based in Omaha, Neb., Ryan Fleischer, the LPL adviser, was audited by the IRS in 2012. The government later determined that he owed about $40,000 in back taxes from 2009 to 2011. According to a court filing, the IRS claims that Mr. Fleischer, the sole shareholder of Fleischer Wealth Plan, or FWP, had not properly set up his business by using the S Corp format, which allowed him to pay less in taxes.


The IRS maintained that Mr. Fleischer is a sole proprietor and should have used a Form 1040 and Schedule C to report his business income, rather than assigning it to the S Corp.

In May 2015, Mr. Fleischer sued the IRS in the U.S. Tax Court in Iowa, hoping to overturn the order to pay back taxes.

Howard Kaplan, Mr. Fleischer's attorney in the matter, said the IRS' argument hinges upon the fact that LPL, as required by law, pays Mr. Fleischer, and not the S Corp.

“What makes this unique is that the S Corp shareholder gets paid by the broker-dealer because they are licensed through the B-D,” Mr. Kaplan said. “By law, the broker-dealer has to pay the individual and not the corporation. In most other situations, like an individual who owns his own contracting business, it's the S corporation that gets paid. It's a unique pattern here.”

A spokesman for the IRS, Michael Dobzinski, said he could not comment on a pending case.

(Related read: SEC bars ex-LPL broker over churning)

“I was trying to operate and run a business,” Mr. Fleischer said, adding that he went to graduate school around the time of the IRS audit, increasing the pressure he faced. “Any time you get involved with the IRS, they're going to check out everything else — your cash register, your expenses. It's a complete mess.”

And financial advisers who own their businesses better take notice, he warned. If the judge sides with the IRS in the matter, thousands of advisers could collectively stand to lose hundreds of millions of dollars in revenue annually, Mr. Fleischer estimated.

The impact could be broad. “I don't think this issue is limited to broker-dealer business,” said Chrys Lemon, a partner at McIntyre & Lemon. “Solo practitioners have been operating like this for years. I think this is a pretty important case.”

So far, Mr. Fleischer's legal bills are between $40,000 and $50,000, he said. He looked for help from his firm, LPL Financial, as well as the Financial Services Institute, an industry trade group, and he said he was met by a lack of urgency from both organizations.

“While we do work with regulatory agencies to fix regulations and laws that we find are not working properly, our long-held policy is that we do not — and cannot — get involved in individual enforcement matters,” said Chris Paulitz, a spokesman for FSI. “We explain this thoroughly to any member who reaches out to us.”

(Related read: The DOL rule kicks in. Will independent broker-dealers survive?)

LPL declined to comment.

“I don't know if they weren't taking me seriously or wanted it swept under the rug, but I've fought as much as I could,” Mr. Fleischer said. “I'm done doing my own research and educating the IRS on this. I've asked both LPL and the FSI for help and it was nil. It's like being in the 'Hunger Games.' You have to fend for yourself.”


What do you think?

View comments

Recommended for you

Upcoming Event

Jul 10


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


Advisers should look beyond 529 plans for college planning

Editor Fred Gabriel talks to reporter Ryan Neal about how college-savings strategies are more important than ever as tuition costs soar.

Latest news & opinion

New ways to pay for college

Experts respond to real-life scenarios of people struggling to afford higher education.

How technology is reshaping the advice business

Artificial intelligence, Amazon and robo-advisers are some of the topics on the minds of tech experts.

Best- and worst-performing sector funds and ETFs this year

A rising tide may lift all ships, but a bull market doesn't lift all stock sectors. Here are the best- and worst-performing sectors this year, with the top and bottom fund in each sector.

Betterment slapped with $400,000 fine from Finra

Robo-adviser cited for violating customer protection rule and not maintaining its books and records correctly.

Supreme Court ruling on SEC judges unlikely to upend advice industry

But it could give rise to new hearings for some advisers who are already in litigation with the agency such as Dawn Bennett.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print