1 Pub. L. No. 97–34, 95 Stat. 172 (Aug. 13, 1981) [hereinafter cited as ERTA]. ERTA amends the Internal Revenue Code of 1954, which is codified at 26 U.S.C. The most recent version of the I.R.C. before ERTA amendment is found in 26 U.S.C. (1976 & Supp. III 1979), and 26 U.S.C.A. (West Cum. Sup. 1981).Google Scholar

2 Also known as a Keogh Plan, Self-employed Individuals Tax Retirement Act of 1962, Pub. L. No. 87–792, 76 Stat. 826.Google Scholar

3 ERTA § 312(a) (amending I.R.C. § 404(e)).Google Scholar

4 ERTA § 311(a) (amending I.R.C. § 219).Google Scholar

5 ERTA §§ 311(i) and 312(f). Because the increase in permissible H.R. 10 plan contributions applies with respect to taxable years beginning after Dec. 31, 1981, self-employed persons who participate in an H.R. 10 plan sponsored by a fiscal-year partnership will not be able to take advantage of the increase until 1983. See I.R.C. §§ 404(e) and 706(a).Google Scholar

6 Resolution of the American Bar Association House of Delegates, adopted Feb. 1978; Tax Section Recommendation No. 1972–2. See The President's 1978 Tax Reduction and Reform Proposals: Hearings Before the House Committee on Ways and Means, Part 3, 95th Cong., 2d Sess. 1528 (1978) (statement of John S. Nolan, Chairman of the ABA Special Committee on Retirement Benefits Legislation); Tax Incentives for Savings: Hearings Before the House Committee on Ways and Means, 96th Cong., 2d Sess. 686 (1980) (statements of E. Charles Eichenbaum, Chairman of the ABA Standing Committee on Retirement of Lawyers, and James T. O'Hara, Chairman of that committee's Subcommittee on Legislation); The Report of the President's Commission on Pension Policy: Hearings Before the Subcommittee on Savings, Pensions, and Investment Policy of the Senate Committee on Finance, 97th Cong., 1st Sess. 361 (1981) (statement of James T. O'Hara, Acting Chairman of the ABA Standing Committee on Retirement of Lawyers); Tax Reduction Proposals: Hearings Before the Senate Committee on Finance, Part 1, 97th Cong., 1st Sess. 251 (1981) (statement of Harvie Branscomb, Jr., Chairman of the ABA Section of Taxation); and Hearings on S. 1541 Before the Subcommittee on Labor of the Senate Committee on Labor and Human Resources, 97th Cong., 1st Sess—(1981) (statements of E. Charles Eicherbaum and James T. O'Hara of the ABA). See also Nolan, John S., Discrimination Against the Self-employed, 64 A.B.A.J. 683 (1978).Google Scholar

7 ERTA § 312(c)(3), (4) (amending I.R.C. § 4010))- A “self-employed person” is anyone who has net earnings from self-employment to the extent that such earnings are earned income or personal service compensation and are subject to the self-employment tax. I.R.C. § 401(c)(1).Google Scholar

8 ERTA § 312(e) (amending I.R.C. § 72(m)).Google Scholar

9 ERTA § 314(a) (amending I.R.C. § 401(d)(5)). An “owner-employee” is a self-employed person who owns the entire interest in an unincorporated trade or business or, in the case of a partnership, owns more than 10 percent of either the capital or profits interest in the partnership. I.R.C. § 401(c)(3).Google Scholar

10 ERTA § 312(b)(1) (amending I.R.C. § 401(a)(17)). A “common law employee” is an individual who is an employee under the common law employer-employee rules and is subject to the FICA tax. I.R.C. § 3121(d)(2); Reg. § 31.3121(d)-1(c).Google Scholar

11 I.R.C. §§ 401(a)(4) & (5), 401(d)(6).Google Scholar

12 ERTA § 312(b)(1) (amending I.R.C. § 401(a)(17)).Google Scholar

13 H.R. Rep. No. 97–201, 97th Cong., 1st Sess. 141 (1981).Google Scholar

14 I.R.C. §§ 72(m)(4) and 4975(d).Google Scholar

15 ERTA § 312(d) (amending I.R.C. § 72(m)).Google Scholar

16 Generally, participant loans must be made in accordance with specific plan provisions regarding loans, must bear a reasonable rate of interest, must be adequately secured, must provide a reasonable repayment schedule, and must be available to all participants on a nondiscriminatory basis. See I.R.C. §§ 401(a)(13) and 4975(d)(1); see also Rev. Rul. 67–288, 1967–2 C.B. 151, and I.R.S. Publication 778 (part 5(o)).Google Scholar

17 ERTA § 311(a) (amending I.R.C. § 219).Google Scholar

18 Compare I.R.C. § 219(b)(2)(A) with ERTA § 311(a) (amending I.R.C. § 219).Google Scholar

19 ERTA § 311(a) (amending I.R.C. § 219).Google Scholar

20 ERTA § 311(b)(1) (adding I.R.C. § 72(o)(2)). See also I.R.C. § 408(f).Google Scholar

21 I.R.C. § 408(a)(6).Google Scholar

22 ERTA § 311(b)(1) (adding I.R.C. § 72(o)(3)). See also I.R.C. § 408(e)(2) and (4).Google Scholar

23 ERTA § 311(b)(2) (amending I.R.C. § 402(e)(4)(A)).Google Scholar

24 ERTA § 311(d)(1) (amending I.R.C. § 2039(c)).Google Scholar

25 ERTA § 311(i).Google Scholar

26 I.R.C. § 415(c) and (d); IR-82-18 (Feb. 3, 1982).CrossRefGoogle Scholar

27 I.R.C. § 415(d).Google Scholar

28 I.R.C. § 415(b), (d); IR-82–18 (Feb. 3, 1982).CrossRefGoogle Scholar

29 I.R.C. $4 404(a)(1)(A).Google Scholar

30 I.R.C. § 4010).Google Scholar

31 I.R.C. §§ 79, 105, and 106.Google Scholar

32 I.R.C. § 401(a)(13). See notes 14–16 supra.Google Scholar

33 See note 15 supra.Google Scholar

34 ERTA § 231(a)(1) (amending I.R.C. § 11(b)(1); see, however, pp. 172–75 infra.Google Scholar

35 I.R.C. § 11(b)(3)-(5) (18 percent (19 percent for 1982) on the second $25,000 of taxable income, 30 percent on the third $25,000 of taxable income, and 40 percent on the fourth $25,000 of taxable income, and 46 percent on taxable income in excess of $100,000).Google Scholar

36 See, e.g., D.C. Code Ann. § 29–611 (1981). See also Berrien C. Eaton, Jr., Professional Corporations and Associations § 9.04[15], 17 Business Organizations (New York: Matthew Bender Co., 1974).Google Scholar

37 Schnapp, Hochberg & Sommers v. Nislow, 106 Misc. 2d 194 (1980).Google Scholar

38 Compare I.R.C. §§ 3101 and 3111 (6.7 percent) with I.R.C. § 1401 (9.3 percent).Google Scholar

39 I.R.C. § 162.Google Scholar

40 Many states have adopted rules applicable to professional corporations requiring that all shareholders be licensed to practice in the state of incorporation. See generally Eaton, supra note 36, § 9.04[22].Google Scholar

41 I.R.C. § 414(m); Rev. Rul. 81–105, I.R.B. 1981–12, 27. See Neal, Philip S. & Con-away, Harry J., New Section 414(m) Limits Qualified Plan Abuse by Affiliated Service Organizations, 54 J. Tax. 258 (1981).Google Scholar

42 See Rev. Rul. 81–202, I.R.B. 1981–34, 5 (provides guidelines for determining comparability of plans).CrossRefGoogle Scholar

43 Rev. Rul. 81–105, I.R.B. 1981–12, 27.Google Scholar

44 See pp. 172–76 infra.Google Scholar

45 See I.R.C. §§ 404(a)(1)(A)(iii) & 412(b)(2)(B)(ii), (iii).Google Scholar

46 I.R.C. § 401(k).Google Scholar

47 “Actual deferral percentage” is the average of the ratios, calculated separately for each employee, of the amount of employer contribution for such employee in a plan year to the employee's compensation in such plan year. I.R.C. § 401(k)(3)(B).Google Scholar

48 I.R.C. § 401(k)(3), (4). This section also includes an alternative that a plan is not discriminatory if the average deferral percentage for the one-third higher-paid employees is not more than 3 percentage points and 150 percent higher than the average deferral percentage for the two-thirds lower-paid employees.Google Scholar

49 See notes 34–35 supra.Google Scholar

50 See I.R.C. § 535(c).Google Scholar

51 See I.R.C. § 61.Google Scholar

52 I.R.C. § 331(a)(1).Google Scholar

53 I.R.C. § 1014.Google Scholar

54 I.R.C. § 1561(a).Google Scholar

55 See pp. 172–75 infra.Google Scholar

56 ERTA § 232(a) (amending I.R.C. § 535(c)(2)).Google Scholar

57 I.R.C. § 414(m). See note 41 supra.Google Scholar

58 Compare Rev. Rul. 80–198, 1980–2 C.B. 113, and LTR 7942077 (July 23, 1979) with M. Buten & Sons, Inc. v. Commissioner, 31 T.C.M. 178 (1972), and David R. Webb Co. v. Commissioner, 77 T.C—, No. 78 (1981).Google Scholar

59 If upon “retirement” of the professional corporation, the corporation is treated for tax purposes as having terminated, then the partnership's obligation to pay unfunded retirement benefits to the corporation may be deemed distributed to the shareholder. It is thus possible that the shareholder would be required to include as ordinary income in the year of distribution the full value of the obligation.Google Scholar

60 But see the discussion of the Keller case at pp. 172–75 infra. In Keller, the taxpayer guaranteed his corporation's obligations arising out of its participation as a partner in a professional partnership. The court held for the taxpayer.Google Scholar

61 Keller v. Commissioner, 77 T.C. —, No. 70 (No. 7128–79, Oct. 29, 1981); Foglesong v. Commissioner, 77 T.C—, No. 74 (Nos. 4725–73, 4726–73, Nov. 16, 1981).Google Scholar

62 Unpublished compilation by the Incorporation of Law Firms Subcommittee of the Committee on Professional Service Corporations, based on the Martindale-Hubbell Law Directory.Google Scholar

63 See Keller v. Commissioner, 77 T.C—, No. 70 (No. 7128–79, Oct. 29, 1981); Dean A. McGee v. United States, 47 AFTR 2d 81–913 (D. Neb. 1980); Roubik v. Commissioner, 53 T.C. 365 (1969); and LTR 8031028 (Apr. 25, 1980). See also Remarks of Assistant Commissioner Gerald D. Portney at the Federal Bar Association's Fifth Annual Tax Law Conference in Washington, D.C., in BNA Daily Tax Report G6-G7 (Mar. 17, 1981) (“It is certainly much too late in the day for the Service to deny the viability of personal service organizations”).Google Scholar

64 I.R.C. § 702.Google Scholar

65 See Reg. § 1.1348-3(a)(3)(ii).Google Scholar

66 I.R.C. §§ 11 and 63.Google Scholar

67 I.R.C. § 162(a)(1). See, e.g., Petro-Chem Marketing Co. v. United States, 602 F.2d 959 (Ct. Cl. 1979); Nor-Cal Adjusters v. Commissioner, 503 F.2d 359 (9th Cir. 1974); Charles McCandless Tile Serv. v. United States, 422 F.2d 1336 (Ct. Cl. 1970); Reg. § 1.162-7; and Rev. Rul. 79–8, 1979–1 C.B. 92.Google Scholar

68 ERTA § 101(a) (amending I.R.C. § 1) and ERTA § 101(c) (repealing I.R.C. § 1348).Google Scholar

69 See Stanton D. Rosenbaum, The Court of Claims Holding on a Legal PC's Reasonable Compensation: Problems Remain, 55 J. Tax. 138 (1981).Google Scholar

70 See the discussion of the Keller and Foglesong decisions of the Tax Court, at pp. 172–75 infra.Google Scholar

71 I.R.C. §§ 541, 542(a)(1), and 543(a)(7).Google Scholar

72 See Rev. Rul. 75–250, 1975–1 C.B. 172, and Rev. Rul. 75–67, 1975–1 C.B. 169. In addition, a corporation may not be a personal holding company if five or fewer individuals do not own more than 50 percent of the corporation's stock. I.R.C. § 542(a)(2).Google Scholar

73 A one-person professional corporation's distributive share of a law partnership's profits was not personal holding company income because the corporation, not the partnership, had the sole authority to designate who performed legal services on the corporation's behalf, because the shareholder-employee's services were not so unique that other lawyers could not perform them, and because the partnership was free to substitute other partners and associates when their services were needed. LTR 8151082 (Sept. 25, 1981).Google Scholar

74 I.R.C. §§ 531–537.Google Scholar

75 I.R.C. § 1561(a).Google Scholar

76 ERTA § 232(a) (amending I.R.C. § 535(c)(2)).Google Scholar

77 See LTR 8031028 (Apr. 25, 1980).Google Scholar

78 77 T.C—No. 70 (No. 7128–79, Oct. 29, 1981).Google Scholar

79 53 T.C. 365 (1969).Google Scholar

80 621 F. 2d 865 (7th Cir. 1980), reversing and remanding T.C. Memo 1976–294, 35 T.C.M. 1309 (1976).Google Scholar

81 64 T.C. 1066 (1975).Google Scholar

82 Interestingly enough, the dissent did not use this point to argue that the corporation should be disregarded under the test of Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943), which requires that the corporation have a business purpose or actually conduct business. The dissent does allude to this by stating that it is assuming that the corporation is not a sham. The failure to develop the argument may suggest that the dissent, like the majority, would accept the fact that benefits under qualified corporate plans are a valid business reason for incorporating. In a larger sense, however, the dissent's distinction between the business of the partnership and that of the professional corporation seems artificial. Inasmuch as the partnership is nothing more than an aggregation of partners, the partners should be thought of as engaged in the business of the partnership.Google Scholar

83 77 T.C—, No. 74 (Nov. 16, 1981).CrossRefGoogle Scholar

84 Whether a partnership of professional corporations in which each corporation has separate assets, facilities, and employees would pass muster under the dissent's rationale remains uncertain.Google Scholar

85 See I.R.C. §§ 706 and 708.Google Scholar

86 I.R.C. § 708(b)(1)(B).Google Scholar

87 Keller v. Commissioner, 77 T.C.—, No. 70 (No. 7128–79, Oct. 29, 1981). See also LTR 8003010 (Sept. 27, 1979).Google Scholar