Christine Peterson was an independent beauty consultant for Mary Kay, Inc. She earned commissions on wholesale purchases of Mary Kay products by her network of independent beauty consultants.
Peterson and Mary Kay entered into a nonqualified deferred compensation arrangement, whereby Peterson would continue to receive a portion of her commissions after retirement.
Christine Peterson and her husband formed a partnership under which they created a defined benefit retirement plan for her. The partnership reported the postretirement payments from Mary Kay as income and deducted contributions to the retirement plan.
The Tax Court agreed with the IRS that the payments made by Mary Kay under the nonqualified deferred compensation arrangement were subject to self-employment tax. Moreover, since the partnership was not engaged in a trade or business, it could not deduct contributions made to the defined benefit retirement plan (Christine C. Peterson and Roger V. Peterson v. Commissioner, TC Memo 2013-27, Nov. 25, 2013).