MLR

Replaced – but still responsible for reporting income

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The Tax Court ruled in a recent case that a doctor with a minority ownership interest in a medical practice organized as an S corporation was not deprived of the economic benefit of his share of ownership – although he was excluded by the majority owner from participating in the corporation’s activities.

Accordingly, he was obligated to report his share of the corporation’s undistributed profits and interest income (Ramesh T. Kumar v. Commissioner, T.C. Memo 2013-184, Aug. 13, 2013).

Dr. Kumar owned 40 percent of the S corporation. Another doctor, who also served as president and chairman, owned the remaining 60 percent.

When a dispute arose among the two doctors, Dr. Kumar’s role in the practice was replaced by another doctor, who was an employee of the corporation. Dr. Kumar received no compensation and no distributions, and he did not take part in the operations or management of the corporation.

The corporation issued a Schedule K-1 to Dr. Kumar showing his share of the income as exceeding $200,000. The court concluded that, since Dr. Kumar had never agreed to relinquish his ownership in the corporation, he was responsible for reporting his share of the income.