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1998, respectively. Petitioner claimed deductions for
compensation of officers of $26,000 in 1997 and $40,000 in 1998;
petitioner did not claim any deductions for salaries and wages.
Schedules K-1, Shareholder’s Share of Income, Credits,
Deductions, etc., attached to the returns show $214,896.40 for
1997 and $316,484.05 for 1998 as the pro rata share of, and as a
property distribution other than a dividend to, Sadanaga.
Petitioner’s Forms 1120S were signed by Sadanaga as president and
by Joseph M. Grey (Grey) as preparer.
During 1997 and 1998, petitioner did not issue any Forms W-
2, Wage and Tax Statement, to Sadanaga. Petitioner issued Forms
1099-MISC, Miscellaneous Income, to Sadanaga for 1997 and 1998
reporting respective payments of $26,000 and $46,000.
Petitioner did not file a Form 941, Employer’s Quarterly
Federal Tax Return, for any quarter in 1997 or 1998 or a Form
940, Employer’s Annual Federal Unemployment (FUTA) Tax Return,
for 1997 or 1998. Since petitioner’s incorporation in 1991 to
the present, petitioner has not filed any Federal or employer tax
returns reporting any payments to Sadanaga as salary or wages for
services provided by or on behalf of petitioner.
The Sadanagas’ Tax Reporting
For each of the years 1997 and 1998, Sadanaga and his spouse
filed a joint Form 1040, U.S. Individual Income Tax Return. On
these returns, the Sadanagas reported as ordinary income from
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