The Tax Court decision in Fleischer [12/29/16] is bound to cause a great deal of consternation for the insurance and financial planning industries. Typically, financial planners who sell insurance products and investment securities enter into broker contracts with a licensed broker/dealer. Many financial planners operate their business as an S Corporation. Generally, broker/dealers cannot pay commissions to an entity unless the entity formally registers as a licensed broker/dealer. Instead, the broker/dealer pays the commission to the financial planner and the financial planner assigns the commission to the S Corporation. This was the case in the current decision. On February 2, 2006, the taxpayer entered into a representative agreement with a financial services company whereby his relationship with the company was that of an independent contractor. Later he entered into a broker contract with another broker dealer. On February 7, 2006, the taxpayer formed an S Corporation but did not enter into an employment agreement with the S Corporation until February 28, 2006. The taxpayer was paid an annual salary to perform duties in the capacity of a financial advisor. The agreement included common provisions found in employment agreements, but it did not include a provision requiring the taxpayer to remit any commissions or fees from the financial services company to the corporation. During the taxable years 2009-2011, the S Corporation reported net income of $11,924, $147,642, and $115,327, respectively. During the same period, the taxpayer reported annual wages from the S Corporation of about $35,000. The IRS issued a notice of deficiency for nearly $42,000 for the three years in question claiming that the taxpayer should have reported the S Corporation‘s gross receipts as self-employment income on Schedule C. The Tax Court first noted that it has long been held that income is taxed to those who have earned it. However, when a corporation is involved, the question of who earned the income is not so easily answered. In this situation, this question has evolved to one “who controls the earning of the income.” Under a previous Tax Court decision (Johnson, 1982), the court held that for the corporation to be the controller of the income, two elements must be found: (1) the individual providing the services must be an employee of the corporation whom the corporation can direct and control in a meaningful sense, and (2) there must exist between the corporation and the person or entity using the services a contract or similar indicium recognizing the corporation's controlling position. In the current case, the Tax Court observed that the S Corporation was not a party with either of the contracts between the taxpayer and broker/dealers. The taxpayer countered that it was impossible for the broker dealers to contract directly with the S Corporation because the S Corporation was not a registered entity under the securities laws and regulations. The Tax Court responded that the S Corporation was not prohibited from registering and the fact it had not registered did not allow the taxpayer to assign the income he earned in his personal capacity to the S Corporation. The court found no indicium for the broker dealers to believe that the S Corporation had any meaningful control over the taxpayer. Having failed the second test in the Johnson decision, the Tax Court ruled it was not necessary to determine whether the first element in the Johnson decision was satisfied. Accordingly, it ruled that the income earned under the representative agreement with the financial services company and broker contract with the broker dealer should have been reported by the taxpayer, not the S Corporation. Note: Unfortunately, the case does not provide any details regarding the S Corporation’s activities and expenses. If the S Corporation has employees providing substantial services in assisting the financial planner, the S Corporation’s “controlling position” could be established. To help establish this controlling position, the corporation should document through its employment contracts or otherwise the responsibilities of each employee and how the services of each employee including the financial planner are essential in earning the commission income. For a copy of the complete Tax Court decision