Court Opinion

ID: 9785225
Source: CourtListenerOpinion
Date Created: 2023-08-30 21:11:03.767904+00
Date Added: 2024-06-11T07:36:12.519670
License: Public Domain

SILVER, J.,
dissenting.
[¶21] I respectfully dissent from the opinion of the Court. Because the attorneys formed valid and legal professional corporations under New Hampshire law, we should not pierce that corporate form to tax the attorneys individually.
[¶ 22] New Hampshire law enables a single attorney to operate in a corporate form with all the attributes of a corporation. See N.H.Rev.Stat. Ann. §§ 294-A:l to :31 (2010). The law further provides that the corporation may form a partnership with other legal entities. See id. § 294-A:4. No statutory requirement exists for a New Hampshire professional corporation to have an employment contract for its sole professional employee, and similarly there is no requirement that the New Hampshire professional corporation do business only in New Hampshire. The New Hampshire attorneys conformed to New Hampshire corporate law by establishing professional corporations that became partners in the Preti Flaherty partnership. See id.
[¶ 23] Corporations did not exist at common law and are entirely statutory creatures. A corporate form of governance allows a corporate form of taxation. This has been true in the Maine legal world since Maine first allowed professional associations in 1969. See P.L.1969, ch. 411 (effective Oct. 1,1969).
[¶ 24] The dispute here arises because the New Hampshire attorneys have crossed state borders and their professional corporations became partners in a Maine LLP. An additional and more important factor is that New Hampshire has no personal income tax and Maine does. No one is alleging a violation of Maine or New Hampshire law by this corporate arrangement. However, the Assessor seeks to disregard the corporate form for tax purposes. The majority agrees with the Tax Assessor because “the professional corporations exercised no control over the attorneys.”
[¶ 25] As long as the New Hampshire attorneys were licensed in New Hampshire to practice law, each of them could and did form a corporation to do business. See N.H.Rev.Stat. Ann. §§ 294-A:2, :8. As long as they remain the sole employees of *1206their corporations, no statute or announced tax regulation requires that they do more. This is because each attorney remains personally liable for his malpractice and is not shielded by the corporation for such malpractice. See id. § 294-A:17(II). Traditional corporations, in contrast, limit the liability of the shareholders and employees in almost all circumstances.
[¶ 26] The United States Supreme Court has long allowed assignment of income to corporations. See Moline Props., Inc. v. Comm’r, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943). The Court observed in Moline:
The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator’s personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity.
Id. at 438-39, 63 S.Ct. 1132 (footnotes omitted). The corporate form may be disregarded only “where it is a sham or unreal.” Id. at 439, 63 S.Ct. 1132. This principle of taxing the corporation as a separate entity has been extended by federal courts to professional corporations. See, e.g., Dennis Katz, D.D.S., P.C. v. Comm’r, 83 T.C.M. (CCH) 1629 (2002); Foglesong v. Comm’r, 621 F.2d 865, 872-73 (7th Cir.1980) (stating that the tax court’s emphasis on the absence of a written employment contract was “[t]he elevation of form over substance,” and further noting that “ ‘the absence of any special exclusion of such corporations from corporate taxation ... indicate that to some extent Congress has sanctioned the incorporation of service businesses for tax purposes’ ” (quoting Battle, The Use of Corporations by Persons who Perform Services to Gain Tax Advantages, 57 Taxes 797, 802 (1979))).
[¶ 27] In this case, the New Hampshire professional corporations have offices in New Hampshire and primarily practice in New Hampshire. They generate most of their income in New Hampshire from non-Maine clients. The professional corporations became partners in the Maine law firm and received a partnership distribution from the Maine firm. This is a common payment scheme for partners in law firms. Partnership has its status and legal responsibilities. See 31 M.R.S. §§ 1-1502 (2010). Preti Flaherty entered into a contract with the professional corporations, and nothing more is required. This is the indicium of “control” necessary to satisfy Johnson v. Commissioner, 78 T.C. 882, 891 (1982), aff'd, 734 F.2d 20 (9th Cir.1984). There is no reason to add a requirement onto New Hampshire corporate law.
[¶ 28] Piercing the corporate form of a business can only happen when the party attempting to pierce the veil establishes that “(1) the defendant abused the privilege of a separate corporate identity; and (2) an unjust or inequitable result would occur if the court recognized the separate corporate existence.” Blue Star Corp. v. CKF Props., LLC, 2009 ME 101, ¶ 43, 980 A.2d 1270, 1280. This Court, like other courts, is “generally reluctant to disregard the legal entity and will cautiously do so only when necessary to promote justice,” Johnson v. Exclusive Props. Unlimited, 1998 ME 244, ¶ 5, 720 A.2d 568, 571 (quotation marks omitted), and “we have been loath to allow taxpayers to disclaim the corporate form to avoid paying taxes,” Sturtevant v. Town of Winthrop, 1999 ME 84, ¶ 21 n. 8, 732 A.2d 264, 270. We should stay true to our policy of disregarding the corporate form only in limited circumstances, even when that policy benefits the shareholders. Here, the professional cor*1207porations operated exactly as professional corporations are designed to do.
[¶29] In this case, the attorneys met all the requirements of the New Hampshire corporate form. They did not abuse or misuse the corporate form of doing business. There is no claim that they avoided any governance responsibilities or avoided liability improperly. No client or creditor disputes the use of the corporate form of doing business. There is also no claim of an inequitable result from using the corporate form of doing business.
[¶ 30] Lucas v. Earl is inappropriate to use as precedent for the analysis of tax liability here. In Lucas v. Earl, the taxpayer attempted to split with his non-attorney wife the income he made as an attorney. 281 U.S. 111, 113-14, 50 S.Ct. 241, 74 L.Ed. 731 (1930). This is dissimilar to the facts before us because the attorneys here operated within the structure of the professional corporation, which they were allowed to do. The professional corporations were also partners in Preti Flaherty pursuant to agreement. Lucas did not involve corporate law. In our case the income was earned by the professional corporation and distributed by the partnership to the professional corporation.
[¶ 31] This matter is also distinguishable from Johnson because in that case the basketball team did not sign a contract with the professional corporation. See Johnson, 78 T.C. at 885. Johnson played for the professional team, but his professional corporation did not have a contractual relationship with the team. Id In our case, the professional association has a contractual relationship with the firm and the partnership distribution went directly to the professional corporation.
[¶ 32] Interpreting the law in this manner does not violate any principle of tax policy. Rather, what I propose is in line with “[t]he first principle of income taxation” that income be taxed to the party who earns it. The income was earned by the professional corporation and distributed to the professional corporation by the firm.
[¶ 33] The issue of a written employment contract is a “red herring.” Requiring a written contract elevates form over substance. A corporation can employ individuals. New Hampshire law does not require employment contracts. Why should an employment contract be required for the attorney employee? The professional corporation is limited by the Preti Flaherty agreement to representing clients of the firm. The attorney is further limited in his work by the New Hampshire bar rules.
[¶ 34] The majority opinion will force New Hampshire lawyers who are partners of Maine interstate law firms to give up their partnership status and remain employees, or face Maine income tax. This has negative ramifications for these lawyers and will inhibit Maine firms from merging with firms in other states. In order to remain associated with Maine firms, out-of-state attorneys will be forced to give up the major benefits of partnership. This is the ease in spite of corporate status, which allows New Hampshire attorneys to operate as they did in this matter and fully comply with New Hampshire law. The majority opinion also jeopardizes the tax status of hundreds of professional corporations in Maine by authorizing the State Tax Assessor to look past the corporate form of many of these entities.
[¶ 35] The practice of law is changing and now crosses state borders frequently. We are moving into a new era of practice both domestically and internationally. As long as state legislatures allow a corporate form of practicing law, our Tax Assessor must acknowledge this cross-border type of practice. There is no reason here to pierce the corporate form of business and *1208declare that form inappropriate for tax purposes.
[¶ 36] For these reasons, I disagree with the conclusion of the majority.