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Mulcahy, Pauritsch, Salvador & Co., Ltd. v. Commissioner
United States Court of Appeals for the Seventh Circuit
680 F.3d 867 (2012)
Mulcahy, Pauritsch, Salvador & Co., Ltd. (Mulcahy) (plaintiff) was a corporate certified public accounting firm with annual revenues between $5 million and $7 million. Despite its revenues, Mulcahy paid very little to no income tax because it claimed it had no income. Mulcahy maintained that its revenue was offset by compensation paid to its three founding shareholders. At the end of each year, Mulcahy paid additional money, which it classified as consulting fees, to the three founding shareholders. Mulcahy did not withhold payroll taxes on the money, report it as employee compensation, or disclose the money on the shareholder-compensation schedules. The Internal Revenue Service (the IRS) (defendant) reclassified these payments as dividends and determined corporate-tax deficiencies against Mulcahy. Mulcahy argued that the fees were salary expenses, not dividends, and that it had classified the payments as consulting fees because it wanted to conceal from the rest of its employees how much the founding shareholders were making. The United States Tax Court upheld the IRS’s determination and added a statutory penalty for Mulcahy’s understatement of its income-tax liability because Mulcahy was an accounting firm and had taken its own advice about corporate taxes in a conflict of interest. Mulcahy appealed.
Rule of Law
Holding and Reasoning (Posner, J.)
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