Luker v. State Tax Assessor
17 A.3d 1198
Me.2011Background
- Luker, Sullivan, and Leeming (the Attorneys) were partners in Preti Flaherty LLP, a Maine law firm, with offices in New Hampshire; they lived/worked in New Hampshire but paid Maine income taxes as Maine-source income.
- In 2003-2004, each Attorney transferred his Preti partnership interest to his own New Hampshire professional corporation (PC), with PCs owned/controlled by the Attorneys and used to provide services to Preti.
- Preti reorganized to an LLP in 2004; PCs were designated as co-employers for profit sharing/401(k) purposes and received partnership distributions in 2004-2005, used to pay the Attorneys’ salaries.
- The Maine Tax Assessor disregarded the corporate form, treating the partnership distributions as income to the Attorneys individually under the assignment of income doctrine, and issued Maine tax assessments for 2004-2005.
- Attorneys filed petitions for review arguing the PCs should be recognized as separate entities; the Superior Court granted summary judgment for the Assessor on this issue.
- The Supreme Judicial Court of Maine affirmed the summary judgment, applying the Johnson test to determine the true earner of income and holding the Attorneys, not the PCs, earned the partnership distributions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Johnson test applies to partnership distributions to PCs | Luker: Johnson test should determine true earner remains the individual | Assessor: Johnson test applicable to assign income to true earner | Johnson test applies; income attributed to individuals |
| Whether the PCs were entitled to separate corporate taxation | PCs were valid New Hampshire entities exercising control | PCs lacked meaningful control over Attorneys’ services | Court held PCs lacked control; income attributed to Attorneys |
| Whether corporate form should be disregarded to avoid Maine taxes | Disregarding corporate form constitutes tax avoidance without substance | Disregarding corporate form appropriate to ensure proper taxation | Disregarding corporate form upheld; Attorneys taxed individually |
| Whether the cross-border corporate structure favors Maine tax policy or undermines it | Cross-border corporate practice should be respected; no Maine-source shift | Structure used to minimize Maine taxes | Structure not respected; income taxed to individuals |
Key Cases Cited
- Lucas v. Earl, 281 U.S. 111 (U.S. 1930) (first principle—income taxed to the earner; control and contract considerations)
- Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (U.S. 1943) (corporate entity treated as separate taxable entity unless a sham)
- Haag v. Commissioner, 88 T.C. 604 (Tax Court 1987) (professional corporation as true earner where PC controls services)
- Johnson v. Commissioner, 78 T.C. 882 (Tax Court 1982) (Johnson test: corporate control and contract indicia determine true earner)
- Basye v. United States, 410 U.S. 441 (U.S. 1973) (assignment of income doctrine to prevent tax avoidance through anticipatory assignments)