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Return, for any quarter during the period at issue. On Schedules
E, Supplemental Income and Loss, of Dr. Sadanaga’s 1994, 1995, and
1996 Forms 1040, U.S. Individual Income Tax Returns, Dr. Sadanaga
reported his share of petitioner’s income (as indicated on the
Schedules K-1) as nonpassive income from an S corporation.
Dr. Sadanaga was a full-time employee of Bristol-Myers Squibb
Co. (Bristol-Myers). He reported wages from Bristol Myers of
$91,212.18 in 1994, $95,891.15 in 1995, and $102,031.14 in 1996.
In 1994, 1995, and 1996, Bristol-Myers withheld Social Security
taxes from Dr. Sadanaga.
Respondent began an audit of petitioner’s return for 1995 in
May 1997. On October 22, 1997, Revenue Agent James Tepper, and
petitioner’s accountant, Joseph Grey, met to discuss the audit.
Revenue Agent Orville Surla joined Revenue Agent Tepper and Mr.
Grey to discuss whether Dr. Sadanaga was an employee of petitioner
in 1995. Mr. Grey asserted that Dr. Sadanaga was not an employee
of petitioner and that the distribution to him from petitioner
represented his share of petitioner’s net income. Mr. Grey
objected to any assessment of Federal employment taxes against
petitioner. Because Mr. Grey and Revenue Agent Tepper could not
reach any agreement with respect to the Federal employment tax
issue, the issue was referred to Revenue Agent Surla.
On March 16, 1998, respondent sent petitioner a 30-day letter,
proposing adjustments to petitioner’s Federal employment taxes for
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