Sixth Circuit Court rules Law Firm is not Exempt from Taxes
Recently, in the case of a Michigan law office, the Sixth Circuit Court upheld a decision to penalize the law firm for not filing a Form 5330, Return of Excise Taxes Related to Employee Benefit Plans. According to a Bloomberg BNA report, the court ruled that the firm was penalized for reasonably acknowledging that it had not paid its taxes.
The background of the initial case
The law office established an employee stock ownership plan in 1998, a Law 360 report explained. This ESOP is a retirement plan that owns securities of the employer that sponsors the program. Then, after the principal established the ESOP, he transferred his ownership to the plan. At the time, ESOPs at S corps like the firm in question were exempt from taxes on income attributable to stocks held in the ESOP until it was distributed. As the principal and his firm were exempt from taxes, there were no returns filed.
However, in 2001, Congress amended the provisions, giving taxpayers a six-month grace period to make back payments and ensure compliance. This provision was amended to combat tax abuses by S corporations that established ESOP programs that were designed to benefit a few key personnel rather than large groups of employees. Congress imposed a 50 percent excise tax on S corp. ESOP programs that did not have employee ownership. Ultimately though, the law firm did not comply within the grace period.
Further complicating the case was the fact that the IRS waited until 2011 to collect the excise tax – which was over $200,000 – that resulted from the firm’s decision not to come into compliance. In the initial case, the court found that Section 4979A, which enforces the excise tax, governed the statute of limitations, and that the time had expired for the IRS to impose the tax.
The court’s initial ruling
The court initially found the IRS was required to adhere to a three-year statute of limitations imposed under Section 4979A. However, when the court reconsidered the case, it ruled that the IRS should have applied a different tax code section.
Therefore, the court found that the statute of limitations never expired because the law firm never properly filed the necessary tax form for the ESOP, which meant that the statute of limitations never started.
The significance of the Sixth Circuit Court’s decision
The lesson for taxpayers, particularly S corps, is that in order to benefit from the three-year statute of limitations, it is crucial that they file the necessary tax form – even if they did not need to when they established the ESOP. Taking this one step further, the guidance for taxpayers in general is that they should file tax returns, even if they believe in good faith that they are tax exempt. It is best that the IRS is provided with the information so that they can calculate any potential taxes.
What Business Owners Get Wrong Before Meeting a Litigation Attorney
What should you expect when meeting a litigation attorney about a business dispute? You should expect to describe the dispute in your own words, hand over the most important documents, flag any deadlines or immediate threats, and leave with a clearer picture of the problem, what information is still needed, and the likely next steps. […]
Arbitration vs. Litigation vs. Mediation: What New Jersey Businesses Should Know Before Signing a Contract
Arbitration resolves disputes privately before an arbitrator whose decision is usually final, while litigation resolves them in court with full rights of appeal. Whether a business ends up in arbitration or litigation is often decided when it signs the contract, long before any dispute arises. Key Takeaways When facing a contract dispute, carefully consider your […]
Can You Own Part of a New Jersey Business Without a Written Agreement?
Can you own part of a business in New Jersey without a written agreement? Yes, it is possible. Under New Jersey’s Uniform Partnership Act, a partnership can arise when two or more people carry on a business as co-owners for profit, whether or not they ever intended to form one. Ownership doesn’t necessarily depend on […]
Crisis-Proofing Your New Jersey Business: Building a Crisis Response Plan Before You Need One
For New Jersey businesses, crisis preparedness should be viewed as a legal and operational function, not simply an emergency-management exercise. A well-designed crisis response plan can help preserve evidence, protect confidential communications, meet reporting obligations, limit unnecessary exposure, and prevent an already difficult situation from becoming a larger legal problem. Key Takeaways A serious crisis […]
Monmouth County's Next Development Wave: What Developers and Investors Need to Know
Monmouth County is entering a significant new phase of development. For those looking to acquire property or undertake a new project, understanding the market opportunity is only the beginning. The more important question is whether a particular property can actually be developed as contemplated and what approvals, agreements, and other conditions will be required to […]
Are Your Conversations with AI Shielded from Discovery? Courts Are Split
Whether a client’s prompts to a generative AI tool and the documents it produces are protected from disclosure depends on the case type, who claims protection, and whether counsel was involved. In United States v. Heppner, a New York federal judge ruled that a criminal defendant’s communications with an AI platform were protected by neither […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
