Dennis Katz, D.D.S., P.C. - Page 3

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          spent 80 percent of his working time treating patients and the              
          remaining time was spent working on general administrative                  
          matters of the practice.  Dr. Katz made all of the medical and              
          administrative decisions and was responsible for the operation              
          and management of the corporation.                                          
               From its inception, petitioner employed a secretary and                
          various dental assistants and hygienists, one of whom was and is            
          Mrs. Katz.  Dr. Katz supervised all the employees.                          
               Petitioner maintained a corporate checking account, and all            
          funds from the dental practice were deposited into that account.            
          Dr. and Mrs. Katz had signatory authority over the corporate                
          account, and the corporate expenses were paid from that account.            
          When Dr. Katz was paid compensation, he wrote a check to himself            
          from the corporate account.  Dr. Katz had personal bank accounts            
          into which these checks were deposited.                                     
               Petitioner’s corporate income tax returns and the Katzes’              
          joint Federal income tax returns were prepared by Bruce Carter,             
          C.P.A.  Mr. Carter added the checks payable from the corporate              
          checking account to Dr. Katz to determine the “management” fees             
          paid to Dr. Katz, and the total amount of the management fees was           
          deducted as “other deductions” on the corporate returns.  The               
          corporate returns showed no deductions for compensation of                  

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