Tax Court to Psychiatrist: LLC Gimmick Doesn't Help With Self-Employment Taxes

For years, taxpayers have been struggling with "self employment" or SE tax (the combined employer/employee Social Security and Medicare tax) arising from LLC income.  To deal with this, a psychiatrist used an S corporation (the income from which is not supposed to subject to SE tax) to siphon off some of the LLC's income and reduce SE tax. 

The psychiatrist's solely owned professional corporation was the "managing member" of an LLC of which he was the member.  The Tax Court (in the 2011 Robucci case) disregarded the managing member for tax purposes, finding the managing member had no business purpose other than tax avoidance. Although the professional corporation was a party to the "operating agreement" of the LLC, there was no evidence that it performed management services for the LLC where it had no other assets or employees, had no service contract with the LLC and paid no salaries in years at issue. Most importantly, it performed no real services for the LLC. Since disregard of the professional corporation left the LLC as a single-member LLC, it was also disregarded under Reg. § 301.7701-2(b)(1)(ii). Therefore, taxpayer was treated as sole proprietor, and any net income arising from his medical practice was compensation subject to self-employment tax.