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Wiley L. Barron, CPA, LTD. v. Commissioner of Internal Revenue

by Beanna J. Whitlock, EA CSA (Guest Author)

T.C. Summary Opinion 2001-10 February 7, 2001

Having become very familiar with the court case, Wiley Barron became easy to talk about, particularly when it came to Sub-Chapter S Corporations and reasonable compensation.

Mr. Barron’s office was located in Pine Bluff, Arkansas. His S Corporation, of which he owned 100%, was formed in 1990 and as a Certified Public Accountant, he was in the business of providing accounting services. He is the only CPA of the S Corporation with two other employees who provide clerical and support services. Mr. Barron, as President, has sole authority over all the actions of the Corporation.

 

The years in question with the IRS were 1994, 1995 and 1996 for the 1120S filed for the S Corporation. The returns reflected the following for Mr. Barron:

 Year Salary Distribution
1994 $2,000 $56,352
1995 -0- 53,257
1996 -0- 83,341

In 1997, the IRS began an Employment Tax Examination of the payroll reporting of the Company.

After a number of extensions of time for assessment, IRS finally re-characterized the distributions to reflect the following:

Year Salary Distribution
1994 $45,000 $13,352
1995 47,500 5,757
1996 49,000 34,341

It should be noted that the IRS for their assessment of salary used a salary guide from Robert Half International. You can download the most recent salary guide at www.roberthalf.com.

On March 30, 1998, IRS assessed increases in employment tax, penalty, and interest based on these changes.

On December 8, 1998, Mr. Barron filed an Offer in Compromise to settle all assessments for $500.

IRS determined that issues existed in the original extensions of time for assessment and rejected the Offer in Compromise. Mr. Barron received the following, “We are sorry, but your offer is rejected because the tax is held to be legally due and an amount larger than the offer appears to be collectible. We do not have authority to accept an offer in these circumstances.”

On May 24, 1999, the IRS sent to Mr. Baron a Notice of Determination Concerning Worker Classification under Section 7436.

IRC 7436

  1. IRC 7436 provides that taxpayers may seek Tax Court review of certain employment tax determinations made in connection with an
  2. IRC 7436 allows the Tax Court to review employment tax determinations involving:
    1. Classification of the taxpayer’s workers as employees, or
    2. The taxpayer’s entitlement to relief treatment under section 530 of the Revenue Act of
    3. The proper amount of employment tax under such
  3. IRC 7436(a) requires that the determination(s) involve an actual controversy and that the determination(s) be made as part of an

On August 24, 1999, Mr. Barron exercised his right to a Tax Court hearing and filed a petition.

The issues for the Court, in part, concerned the statute of limitations on the assessment of tax. The Court addressed the 3-year statute by reviewing the extensions of time Mr. Barron and the IRS entered into and found them to be sufficiently perfected. The Court found that in the year of 1994, it would have been out of statute for assessment had Mr. Barron not filed the Offer in Compromise which extended the statute.

The next issue for the Court was whether Mr. Barron was an employee of the S Corporation. Chapter 21 of subtitle C of the Internal Revenue Code imposes the FICA tax, and Chapter 23 of subtitle C of the Internal Revenue Code imposes the FUTA tax. For purposes of Chapter 21, Section 3121(d)(l) specifically includes within the definition of the term “employee” any officer of a corporation.

Further, the Court looked to Section 31.3121(d)(l)(b), Employment Tax Regulations, which is applicable to Chapter 21 of subtitle C, providing the following:

“Generally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation.”

So Wiley Barron would have been fine with the Court and found favor if he:

  1. Had performed no services for the
  2. Had performed only minor
  3. Was not entitled to receive, directly or indirectly, any

But this was not the case. Mr. Barron was the only CPA for the firm as well as served as the President of the Company with substantial authority to manage the firm.

The Court then held Mr. Barron to be a corporate officer performing substantial services for the Corporation and therefore an employee whose compensation is subject to both FICA and FUTA.

Finally, the Court looked to Internal Revenue Code Section 530 to see if any relief from payroll taxes could be granted, Mr. Barron. They looked at and ruled on the following:

First, consistency requirement. The Company would have had to of treated all similar employees the same and not issued a W-2. In this case, 1994 Mr. Barron was issued a W-2 but not in the subsequent years and he was the only CPA on staff. The Court rejected the argument for Section 530 relief as Mr. Barron did not satisfy the substantive consistency requirement.

The second consideration was eligibility for relief under the Section 530 reasonable basis for not treating Mr. Barron as an employee. The Court stated that they recognized Congress intended that this “reasonable basis requirement be construed liberally in favor of taxpayers.” The Court further rejected this argument as not only was Mr. Barron the managing officer of the Corporation, he was also the “central worker”.

Mr. Barron took one more shot at the Court and quoted from Durando v. the United States. The Court noted that the case did not present any issues involving the classification of a service provider and does not even involve payroll taxes. Rather, the case holds that pass-through income from an S Corporation may not be treated as net earnings from self- employment for the purposes of a Keogh plan deduction.

The Court then ruled that Mr. Barron was not eligible for relief under Internal Revenue Code Section 530 and further arguments were without merit.

Lessons learned:

  • S Corporations are “hot button” for IRS examiners.
  • S Corporate Shareholders who work in the business or are officers are “targets”.
  • Reasonable Compensation must be obtained to keep IRS at bay and “independent sources” to determine the reasonableness of compensation are a must.

I would have loved the opportunity to tell Wiley Barron about RCReports. If he had listened, his ordeal with the IRS would have certainly taken a different course.

I did meet the gentleman once – a once in a lifetime opportunity!

I was teaching a tax class in Little Rock, Arkansas, with about 300 CPAs in attendance. Teaching Reasonable Compensation for S Corporations, naturally, I got to the story of Wiley Barron. Much to my surprise, the people in the class began to shake their heads from side to side. I wondered if I had said something wrong but continued. As I told the story and the details revealed, more in the class were shaking their heads. I finally finished but noticed one man standing at the side and he walked toward me, took my microphone and said:

“Every word she just told you, every figure she used, was absolutely true. My name is Wiley Barron!”

CPA in Pine Bluff, Arkansas and I am teaching CPAs in Little Rock – only in my world.

This month we welcome guest contributor – Ms. Beanna Whitlock, EA, CSA, Director of the ncpeFellowship.  Ms. Whitlock is an accomplished, Educator, Tax Professional, and author, with articles appearing in Time, Newsweek and the Wall Street Journal to mention just a few.

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