Found this and thought it should be preserved and shared. Sounds like ole Dr. Elick tried a little DSO maneuvering.
Peter J Reilly, Contributor
Dental Management Company Did Not Do Any Managing
6/07/2013
Many accountants have a touching faith in double entry. They think that you can move income from one related entity to another with magical journal entries. Management fees are among the favorites. That type of magical thinking was probably behind the unfortunate result in the recent Tax Court decision in the case of Wiley and Sharon Elick and Wiley M. Elick, DDS Inc. Doctor Elick practiced pediatric dentistry, which can be pretty lucrative. It takes a certain flair to keep the kids happy. Doctor Elick was also involved in a center called SurgiTek.
Let’s Have An ESOP
An ESOP (employee stock ownership plan) can yield all sorts of nifty benefits, significant income deferral being among them. We can’t tell from the case the exact benefits Dr. Elick hoped to reap from an ESOP, but there must have been something. It is not mentioned in the case, but there was a legal problem to overcome. Professional corporations generally can only have licensed professionals of that particular profession as shareholders. ESOPs are neat vehicles, but you can’t teach them how to do fillings, so they can’t be shareholders in dental professional corporations.
The solution was to form a dental management company:
A professional advised Dr. Elick to establish a company to manage petitioner’s operations. A stock ownership plan benefiting petitioner’s employees would purchase the company stock from Dr. Elick. The fees generated by management services would fund the employee benefit plan.
