- 10 - Commissioner, T.C. Memo. 1986-444; sec. 1.162-7(a), Income Tax Regs. Compensation meeting those requirements is deductible even if the employer is a parent and the employee a child. Eller v. Commissioner, 77 T.C. 934, 962 (1981); Hamdi v. Commissioner, T.C. Memo. 1993-38, affd. without published opinion 23 F.3d 407 (6th Cir. 1994). When a familial relationship is involved, however, the Court closely scrutinizes the transaction. Denman v. Commissioner, 48 T.C. 439, 450 (1967); Hamdi v. Commissioner, supra. Section 262(a) generally disallows deductions for personal, living, or family expenses. A normal supposition when payments are made to dependent children or when items are purchased for them is that the money or items are in the nature of support and thus nondeductible under section 262. Holtz v. Commissioner, T.C. Memo. 1982-436. In deciding whether payments to a child are deductible, we examine all the facts and circumstances. Eller v. Commissioner, supra. Facts that militate against the deductibility of such payments include: (1) Failing to pay employment taxes7 and file 7 The employment tax sections of the Internal Revenue Code are in subtitle C. Secs. 3111 and 3301 impose taxes on employers under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA), respectively, based on wages paid to employees. See Images in Motion, Inc. v. Commissioner, T.C. Memo. 2006-19. Sec. 3101 imposes a tax on employees based on their wages paid, which the employer is required to collect under sec. 3102. Id. For purposes of FICA, employment does not include service performed by a child under the age of 18 in the employ of his father or mother. Sec. 3121(b)(3)(A). For (continued...)Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
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