Source: http://thorgoodlaw.com/christine-c-peterson-et-al-v-commissioner-of-irs-retirement-payments-may-be-deferred-compensation/
Timestamp: 2018-02-25 19:59:39
Document Index: 426848576

Matched Legal Cases: ['§ 409', '§ 409', '§ 409', '§ 409', '§ 409', '§ 409', '§ 409', '§ 409', '§ 409']

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Christine C. Peterson, et al. v. Commissioner of IRS – Retirement Payments May Be Deferred Compensation
In a case of first impression, the Eleventh Circuit Court of Appeals held that payments from a Mary Kay retirement program to one of its retired salespersons were earnings subject to self-employment tax. This holding was based upon the fact that the plan under which the payments had been made was amended by Mary Kay to comply with the new tax rules under I.R.C. § 409A. (Peterson v. Commissioner No. 14-15773 (11th Cir. May 24, 2016). The IRS considered the payments as nonqualified deferred income from a § 409A plan, therefore subject to the provisions of § 409A, and assessed the Petersons a hefty bill for unpaid self-employment tax.
Christine Peterson was a successful salesperson for Mary Kay cosmetics, reaching the level of national sales director (NSD) before retiring. She was therefore eligible to participate in two post-retirement programs in which participating NSDs receive post-retirement payments calculated based upon past commissions, provided that they agreed to retire at age 65. In 2009, the year at issue here, Peterson did not pay self-employment tax on payments that she received under either plan.
Peterson signed the agreement to participate in the retirement programs before the § 409A rules were enacted, thus the agreement did not specify that the plan was a § 409A plan. Once the § 409A rules were, in fact, passed, as the terms of the original agreement permitted, Mary Kay modified the agreement to state that the plan was subject to the new tax rules of § 409A. The IRS found that the payments were nonqualified deferred income from a § 409A plan, and assessed Peterson $33,594 of self-employment tax. Peterson appealed to the Tax Court, and lost. She then appealed the decision of the Tax Court to the Eleventh Circuit Court of Appeals.
Peterson contended that the retirement payments she received were not subject to self-employment tax because these payments were either for the sale of her Mary Kay business back to the company or for a covenant not to compete she had entered into with Mary Kay. The Eleventh Circuit found no evidence of a sale as there was no existing past agreement to sell the business. It then rejected Peterson’s alternative argument that the payments were for the covenant not to compete as Peterson had violated the covenant within two years of her retirement and she had never stopped receiving payments from Mary Kay as a consequence of her breach.
The Eleventh Circuit affirmed the Tax Court’s decision. It found that Peterson consented to the amendment by signing the original agreements for the two retirement programs that allowed for amendment of the plans by Mary Kay. Peterson was therefore legally bound and required to treat the compensation from the plans as nonqualified deferred compensation subject to self-employment tax.
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Posted in Nonqualified Deferred Income, Self-Employment Tax | Tagged I.R.C. § 409A, nonqualified deferred income, self-employment tax