## Facts

- Stanley W. Haag, an Iowa physician, formed a one-man professional corporation, Stanley W. Haag, M.D., P.C. (P.C.), under Iowa law in 1976.
- The P.C. maintained corporate formalities (bylaws, bank accounts, officers/directors, meetings) and was found to be validly organized and operated, not a sham.
- Haag assigned to the P.C. his partnership interest in Hilltop Medical Clinic and certain other business interests.
- The medical partnership treated the P.C. (not Haag) as the partner and issued partnership tax information to the P.C.
- Haag entered into an employment agreement with the P.C. to provide medical services as an employee.
- For 1979–1981, Haag received no or minimal salary from the P.C., withdrew small amounts directly from the partnership, and exchanged cash advances with the P.C. characterized as loans and repayments.
- The Commissioner issued deficiencies for 1979–1981, asserting that income reported by the P.C. was taxable to Haag under § 61 and the assignment-of-income doctrine and/or should be reallocated to him under § 482.

## Issues

1. Whether income reported by the P.C. was taxable to Haag under I.R.C. § 61 and the assignment-of-income doctrine.
2. Whether I.R.C. § 482 authorized reallocating the P.C.’s income to Haag to clearly reflect income or prevent tax evasion, given their compensation and cash-advance practices.

## Decision

- The Tax Court held that the P.C., not Haag, controlled the earning of the medical partnership income; therefore § 61 and the assignment-of-income doctrine did not apply.
- The court held that § 482 applies to a one-man personal service corporation and requires review of arm’s-length dealing with reference to the entire corporate entity.
- The court found that, except for an initial incorporation loan, the cash advances between Haag and the P.C. were not bona fide loans.
- The court reallocated a portion of the P.C.’s income to Haag under § 482 for 1979 and 1980, but not for 1981.

## Legal Principles

- A properly formed and operated professional corporation is a separate taxable entity and will be respected for federal income tax purposes absent sham.
- For assignment-of-income purposes, the key question is who controlled the earning of the income; if the corporation controls the earning of income and is recognized by payors, the income is not automatically taxed to the shareholder-employee under § 61.
- I.R.C. § 482 may be used to reallocate income between a closely held service corporation and its controlling shareholder when their dealings are not at arm’s length and distort taxable income.
- Labels such as “loans” do not control; advances lacking debt substance may be treated as part of a non-arm’s-length compensation arrangement supporting § 482 allocations.
- In assessing arm’s-length dealing under § 482 in the one-man corporation setting, compensation and cash-flow arrangements are evaluated as an integrated pattern, not as isolated transactions.

## Conclusion

The Tax Court respected Haag’s one-man professional corporation and rejected direct attribution of the corporation’s partnership income to him under § 61, but used § 482 to reallocate income for years in which his salary and purported loan transactions showed non-arm’s-length income shifting.


Haag v. Commissioner, 88 T.C. 604 (1987)