On Advice

Adviser loses IRS fight, putting tax status for solo practitioners in question

Ryan Fleischer has tangled with the government over using a flow-through tax structure known as an "S corporation" to pay himself

Feb 23, 2017 @ 1:30 pm

By Bruce Kelly

In October, I wrote a column about a financial adviser who was squaring off with the IRS in a dispute over using a flow-through tax structure known as an "S corporation" to pay himself.

Financial advisers who are solo practitioners have been operating like this for years, and some in the industry regarded the fight between the adviser, Ryan Fleischer, and the IRS as a cautionary tale for small-business owners. If the IRS could come after Mr. Fleischer and claim he owed about $40,000 in back taxes, would the federal government, ever hungry for more revenue, soon be gunning for them?

Mr. Fleisher got bad news at the end of last year when a U.S. tax court judge ruled against him.

"There's a lot of confusion around this case and a lot of misunderstanding," said Mr. Fleischer, whose practice, Fleischer Wealth Plan, or FWP, is based in Omaha, Neb.

The central point in the dispute was assigning income to Mr. Fleischer's S Corp, he said. The ruling went against him because Mr. Fleischer has a contract and receives payment from his broker-dealer, LPL Financial, but his S Corp, FWP, does not, according to the adviser.

"This puts thousands of reps in the crosshairs of the IRS, and could be detrimental to them," said Mr. Fleischer, who doubts he will appeal because he has already sunk roughly $50,000 in legal costs into the fight.

Let's back up for a moment.

As we reported last fall, the IRS audited Mr. Fleischer in 2012. The government later determined he owed about $40,000 in back taxes from 2009 to 2011. The IRS claimed Mr. Fleischer, the sole shareholder of 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.

In May 2015, Mr. Fleischer, who also sold Massachusetts Mutual Life Insurance Products, sued the IRS in U.S. Tax Court in Nebraska, hoping to overturn the order to pay back taxes.

According to court documents, in 2010 FWP paid Mr. Fleischer a salary of about $35,000, and reported business income from the S Corp of $147,600. No amount was reported for self-employment tax.

Both his LPL and MassMutual contracts were with himself as an individual and did not mention the S Corp. Broker-dealers cannot pay a business entity unless it is another licensed broker-dealer.

"The only issue for decision is whether [Mr. Fleischer] or his S corporation must report the income earned for the years in issue," according to the U.S. tax court decision. Mr. Fleischer "individually, not FWP, should have reported the income earned under the representative agreement with LPL and the broker contract with MassMutual for the years in issue."

There was no way to know whether Mr. Fleischer's S Corp battle was an outlier or a potential nightmare for the financial advice industry, said one tax attorney familiar with the case.

"It's a one-off in that we haven't seen another case like this, but it's also something very relevant to the industry," noted the attorney, who asked not to be identified due to potential future work on the issue. "This case can hurt a business model that is being used and unique to the registered rep community because of the prohibition of giving brokerage commission dollars to someone other than a rep."

When my first column about Mr. Fleischer's predicament appeared, a few readers contacted me and wondered whether he had paid himself too little income, thus drawing the ire and attention of the IRS.

"I'm pretty sure that if Mr. Fleischer paid himself a reasonable salary the IRS would not care that he assigned his income to his S Corporation," noted one reader. "Paying yourself a salary of $35,000 on $150,000 of income is not a reasonable salary. If the sole purpose of your S Corporation is to avoid employment taxes, the IRS will take notice."

Mr. Fleischer sharply disagrees with such an assessment and stresses the potential problems for advisers with one-person shops who assign income to an S Corp.

"This was never about not paying enough salary or avoiding the self-employment tax," he said. "In my opinion, it's government overreach."

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Nov 13

Conference

Best Practices Workshop

For the sixth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video

INTV

The bizarro world of DOL and SEC rule supporters

Managing editor Christina Nelson talks with senior reporter Mark Schoeff Jr. about why groups that supported the Labor Department's fiduciary rule oppose much of the SEC advice package, and vice versa.

Latest news & opinion

10 most affordable U.S. cities for renters

Here are the U.S. cities that are most affordable for renters, according to Business Student.com, which compared the cost of rent to average salaries.

9 best - new - financial adviser jokes

Scroll through for nine new financial adviser laughs.

Captrust, prominent 401(k) advice firm, ramps up its wealth management business

Captrust wants to grow annual revenue from wealth management to 50% from 30% over the next five years.

Fidelity CEO says zero-fee funds aimed at expanding its universe

Johnson says way to prosper in financial services is 'by building relationships.'

SEC advice rule contains a huge hole

Jay Clayton aims to clear up investor confusion by drawing a distinction between brokers and advisers in the agency's proposed package of revised standards. But where do dual registrants fit?

X

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.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print