Another SE Scheme That Didn't Work

Originally published on Passive Activities and Other Oxymorons on March 28th, 2011.
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Renkemeyer, Campbell and Weaver, LLP, et al. v. Commissioner, 136 T.C. No. 7

I often tell my daughter stories about my grandmothers, Nanna Reilly and Nanna Lyons.  When ever I start the story she has to clarify whether I'm talking about the one who liked TV wrestling or the one who smoked.  In case she is reading this, this is about the one who smoked, Nanna Lyons, whose house I grew up in.  Nanna Lyons had a great admiration for her deceased husband, for whom I am named, the New York Yankees and, possibly above all, Franklin Delano Roosevelt.  I could hear her talking to herself from time to time about the greatness of FDR.  It always started with "Social Security".  You see Peter Lyons died in 1940, having paid by my rough estimate about $20 in social security taxes which his widow had more than recovered by the time my father took charge of the air raid wardens of Fairview NJ in 1942.  She collected until her death in 1966 and I am certain that I had Franklin Delano Roosevelt to thank for all those nickels I earned going to the corner store to purchase packs of Kents.

Many of my contemporaries do not think that Social Security is quite the good deal that Nanna Lyons perceived and come up with a variety of schemes to avoid paying social security taxes (including self employment tax).  Renkemeyer, Campbell and Weaver LLP (RCW) came up with an interesting one.

For the law firm's tax year ended April 30, 2004, three of the law firm's partners were attorneys performing legal services. The fourth partner was an S corporation owned by a tax-exempt ESOP whose beneficiaries were the law firm's three attorney partners. For tax year ended April 30, 2005, the law firm's only partners were the three attorneys.


Approximately 99 percent of the law firm's net business income for its tax year ended April 30, 2004, was derived from legal services rendered by the three attorney partners.

For tax year ended April 30, 2004, the law firm allocated 87.557 percent of its net business income to the S corporation.

There was a little bit of the shoemakers children phenomenon at work as the team of tax attorneys could not find their own partnership agreement.

Petitioner asserts that the special allocation of the net business income of the law firm for its 2004 tax year was proper because the allocation was made pursuant to the provisions of the partnership agreement. But as noted supra p. 4, the partnership agreement effective for the 2004 tax year is not in the record.


In 2005, they took a different approach.  The corporation was eliminated as a partner and they divided their interest into general partnership interests and limited partnerships.  Apparently the plan was that the income attributable to the limited partnership interest would not be subject to SE tax.  That didn't work either.

The thing that was bothering me the most about this case is that there appear to have been no penalties asserted.  In a similar SE avoidance scheme, which I have a recent post about, Dr. Tony Robucci, a psychiatrist, was assessed penalties even though he was relying on an attorney CPA advisor.  The Tax Court seemed to think he should have sought a second opinion.  At least one of these fellows was himself a tax attorney, so you would think they would be held to a higher standard.

Perhaps it is because of another adjustment:

Further, respondent reduced the law firm's gross business revenues by $905,000 (and consequently reduced the law firm's net business income) after determining that a legal fee in a like amount had not been received during the 2004 tax year.

Sometimes we lose track of the basics.  Cash basis taxpayers who only report the income that they actually receive don't have to pay as much as those who report more than that.  You would think that the Tax Matters Partner Troy Renkenmeyer would be sensitive to that given his background with Arthur Andersen, where they got into all those difficulties about revenue recognition.