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February 27, 2012

Unreasonably Low Wages by S Corporation Court Case Could Impact Physician Practices

If you are a physican practice organized as an S Corporation, pay attention to the recent tax court case below if you are paying the shareholder(s) low salary and high distributions:

The CPA taxpayer replaced his individually held partnership interest in an accounting firm with his 100% owned S corporation. For the audit years, the accounting firm paid $24,000 in compensation and made profit distributions of $203K and $175K to the taxpayer through his S corporation. An IRS expert estimated the FMV of taxpayer's accounting services to be $91K per year. The 8th Circuit upheld the District Court's findings (1) that the taxpayer was a qualified accountant with an advanced degree and 20 years experience, (2) who worked 35–45 hours per week as a primary earner in a reputable firm with substantial gross earnings, and (3) a $24,000 salary is unreasonably low compared to other similarly situated accountants. David Watson PC v. U.S ., 109 AFTR 2d 2012-XXXX (8th Cir.).

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