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only individual working for petitioner. Tellingly, all of
petitioner’s income was generated from the consulting and surgical
services provided by Dr. Sadanaga.
Petitioner contends that the amounts paid to Dr. Sadanaga were
distributions of its corporate net income, rather than wages.
Petitioner posits that as an S corporation it passed its net income
to Dr. Sadanaga, as its sole shareholder, pursuant to section 1366.
Petitioner’s argument is flawed. Section 1366 only permits use of
S corporation passthrough items in calculating tax liability under
chapter 1, not tax liability under chapters 21 and 23--in which the
Federal employment tax provisions for FICA and FUTA are located.
Sec. 1366(a)(1); see also Ding v. Commissioner, 200 F.3d 587, 590
(9th Cir. 1999), affg. T.C. Memo. 1997-435; Catalano v.
Commissioner, T.C. Memo. 1998-447.
Dr. Sadanaga performed substantial services on behalf of
petitioner. The characterization of the payment to Dr. Sadanaga as
a distribution of petitioner’s net income is but a subterfuge for
reality; the payment constituted remuneration for services
performed by Dr. Sadanaga on behalf of petitioner. An employer
cannot avoid Federal employment taxes by characterizing
compensation paid to its sole director and shareholder as
distributions of the corporation’s net income, rather than wages.
Regardless of how an employer chooses to characterize payments made
to its employees, the true analysis is whether the payments
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