Insurance Agents assigning a 1099-NEC to an S-corp

[Lord Happy]

Happy day....this issue drives me nuts. 

Fact:  An individual insurance agent receives a 1099-NEC in his name and SSN for $231,000.  The contract is between the human and the insurance company.  The human has an S-corp, but it is not registered in all, or any, the states to sell insurance, etc.  The S-corp is not a party to the agreement.

Tactic:  Report the $231,000 on the Schedule C and then put in a $231,000 expense, either as commission or other expense and write "assigned to EIN," and then report the income on the recipient's S-corp where all expenses are reported and reduced wage can be taken. 

Tactic 2:  Report the $231,000 on the Schedule C and pay $200,000 in marketing/consulting/commission fees to an SMLLC filing as an S-corp, take the operating expenses on the S-corp and issue a reduced salary from there.

I have fought against this tactic because I am relying on https://casetext.com/case/fleischer-v-commr-1 and the concept that the corporation does not control the earning of the income. 

Can someone help me understand why I my position is wrong?  Is there a different case, rev proc or even a PLR that says this case doesn't apply and that it is ok to assign the 1099 or structure a S-corp deal this way?

[Terry53029]

There was a recent Tax Court case against a financial advisor (broker) that had his agency contracted to his parent financial company directly to himself as an individual but had a Corporation setup to run his business to which he filed as an S-Corporation with the IRS.  He was paid directly by the financial institution and passed through that income to his S-Corporation.  The Tax Court invalidated his efforts to assign and transfer his commissions into his S-Corporation, finding instead that he should have claimed them as personal income on his Schedule C (and paid self-employment taxes on all of it). Here is an informative link on the subject. https://www.kitces.com/blog/fleischer-s-corporation-commissions-for-brokers-insurance-agents-financi...

[Terry53029]

Sorry just noticed you referenced that case

[BobKamman]

Does buying groceries next month really depend on collecting a fee from this one client?  When someone starts telling me how to do my job, I advise them to find someone else to educate.  This situation sounds like it falls into the "everyone else is doing 85 on the Interstate, and the Highway Patrol can only stop a few of them" category.  If I have to deal with difficult clients, I prefer them at least to be those who drive 10 miles below the speed limit.  

[Lord Happy]

Happy day Bob,

All of my insurance agent clients attended a seminar this summer.  A CPA was a presenter and explained the S-corp stuff to them.  One of my clients called me at break and I told him at the next session, stand up and ask the question of the guy's workaround to the Fleischer case, and when he says the S-corp, tell him that the case specifically addresses insurance agents doing what he said he does so how does he do it.  The guy said he wasn't familiar with the case and that he had been doing it this way for years without an issue. 

But that case is already 6 years old and I never believe that I am the smartest guy in the room.  Which is why I posted here.  Maybe someone knows something that I don't.  Maybe there is a work around.  Maybe there's a new case, rev proc or PLR.  I am willing to accept that I am wrong to stand on Fleischer.  And if I am, I'm hoping someone here can show me that I'm wrong. 

So it isn't about fees.  Its about wanting to know that I am doing my best for the fees clients are happy to pay. 

[BobKamman · Accepted solution]

Shakespeare had a character say, "First we kill all the lawyers."  Today the line might be, "First we cancel all the seminars."  I wonder if the CPA pontificating at the one your client attended, was from out of state?  What I usually come across when researching questions like this is that "it depends" -- on whether state registration laws allows corporations or LLC's to be licensed to sell things like insurance, or securities, or real estate. 

Ask your client why the commissions weren't paid directly to his company.  Is the answer, "that's illegal" ? Then he's out of luck if IRS challenges the "assignment of income."  On the other hand, if he answers like Fleischer in that Tax Court case, "it would cost millions to do the paperwork," then IRS would tell him they doubt it but he should have done it anyway.  

The Fleischer case doesn't set any new precedent, and your "facts and circumstances" might be different, or at least you could try to distinguish them.  What's interesting is that you can't find it on the Tax Court website, because it's "sealed."  Obviously you can find the opinion online from other sources.  The Tax Court recently has had this problem of sealing an entire case when there may be just one document that needs to be kept confidential, perhaps because of an unredacted SSN.  

[Lord Happy]

Happy day Bob,

Thank you for taking the time to help me better frame this for an eventual showdown.  I believe that the ultimate answer from the clients will be three-fold: 

1.  It is too expensive to register their companies with the states in which they would like to sell insurance.

2.  The insurance sales contracts the agencies offer are to individuals and not their companies as either required by state law or chosen by the agency.

3.  There may be a federal/state rule that says that a license follows a human and not an entity.

All of them result in the same options for the clients:

1.  Accept and move on

2.  Pay me a lot of money to come up with a management service organization model that all the agents could own and pay fees to in exchange for legitimately-provided services, then pay the profits back out to the owners or some such thing

3.  Find agencies in states that will do business the way they want to do business

4.  Pay me a lot of money for listening to their tortured cries

I vote for #4!

Thank you.