Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

SEP-TIC FAILURE

May 23, 2008

Simplified employee pensions, or SEPs, are a very handy way for a self-employed taxpayer to shelter money for retirement. They require minimal paperwork, they can be set up as late as the exteneded due date of your tax return, and they can enable a self-employed taxpayer or a small corporation to avoid tax on up to 25% of business income just by saving for retirement.

Once you have employees, though, SEPs aren't nearly as useful, as you have to treat all employees as generously as yourself. Aaron D. Brown learned this lesson the hard way in Tax Court this week.

Mr. Brown set up a SEP through the Vanguard Group for the employees of his S corporation, Aaron D. Brown Mortgage, Inc. The corporation had two employees: Mr. Brown and his wife, Leslie Brown. The company made a $7,200 2003 contribution to Mr. Brown's SEP-IRA in April 2004, and the corporation deducted the $7,200. When the IRS noticed that Mrs. Brown didn't also get a SEP contribution, they disallowed the deduction for the contribution to Mr. Brown's SEP, because all employees have to share in SEP contributions.

The taxpayers tried to salvage the deduction:

Petitioners argued at trial that they have been caught by a mere "technicality". The Court disagrees with petitioners' contention that the failure of the corporation to contribute to an IRA in favor of an employee, Mrs. Brown, was a mere technicality. The requirement, aimed at fairness and equitable treatment for employees, is one of the few basic provisions of the SEP regime.

Even if the provision could fairly be characterized as a "technicality", it is one that was brought to the attention of the president of the corporation, Mr. Brown, more than once in the agreement. Mr. Brown, as president, signed and agreed to the provisions contained in the agreement, including the requirement that each employee receive from the corporation a contribution to his or her IRA.

The tax law is nothing but technicalities, especially in the pension area; ignore them at your peril.

No doubt Mrs. Brown was thrilled that the Tax Court defended her interest in her employer's fairness and equity by disallowing the SEP deduction for their joint return.

Cite: Brown, T.C. Summary Opionion 2008-56.

Related: The Audacity of Paying More Taxes than Necessary

      Bookmark: del.icio.us • Digg • reddit