Peterson v. Commissioner is a case that only a tax person could enjoy.  It is a new opinion from the 11th Circuit, decided on May 24, 2016.  The court’s opinion is 87 pages long and includes a strong dissent on the majority’s use of the Danielson rule.

The Danielson rule permits the Commissioner of the IRS to bind a taxpayer to the tax consequences of her agreement, as construed by the Commissioner, unless the taxpayer “adduc[es]  proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforceability because of mistake, undue influence, fraud, duress, etc.”

Interestingly, the case arose on the question of whether certain post-retirement deferred compensation payments from beauty products giant Mary Kay to one of its independent sellers were subject to self-employment tax.  The court’s opinion includes a great deal of discussion about the relationship between Mary Kay and its sales force.

The taxpayer argued that the payments in question were not subject to SECA tax because they were related to the buyout of her business.  This argument has some support in the tax treatment of post retirement payments to insurance sales people.

The court, however, looked at the wording of the relevant plan documents, including especially amendments made to bring the plan into compliance with Section 409A, and concluded that the payments were subject to the SECA tax.

As payroll taxes and SECA taxes continue to rise, it is likely that there will be more attempts by taxpayers to find ways around the tax, and this case shows that there will be strong enforcement efforts by the IRS.

Court’s Opinion is here