Dennis Katz, D.D.S., P.C. - Page 4

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               Dr. Katz prepared and filed employment tax returns (Forms              
          940 and 941) for the corporation.  Petitioner did not treat Dr.             
          Katz as an employee for employment tax purposes.  Petitioner                
          never issued Dr. Katz a Form 1099 or Form W-2, Wage and Tax                 
          Statement, reflecting the payments made by the corporation to Dr.           
          Katz.  On its 1996 and 1997 corporate returns, petitioner                   
          deducted $93,803.78 and $115,884.75, respectively, as management            
          fees.  Dr. Katz reported these amounts as income on Schedule C,             
          Profit or Loss From Business, on the joint returns filed for both           
               The Internal Revenue Service audited the 1977 and 1980 joint           
          returns of Dr. and Mrs. Katz.  The agent conducting the audit did           
          not have the authority to examine the corporate or employment tax           
          returns of the corporation.  There is no record of petitioner’s             
          corporate or employment tax returns then being examined.  In                
          2000, respondent determined that Dr. Katz was an employee of                
          petitioner during 1996 and 1997, and petitioner was liable for              
          employment taxes for both years.                                            
               The parties have stipulated that, if petitioner is                     
          recognized as a corporate entity for tax purposes, Dr. Katz was a           
          “statutory employee” of petitioner from 1971 to and including               
          1997, and during these years he performed “substantial services”            
          for petitioner.  There is also no dispute as to the amount of tax           
          due if section 530 does not apply.                                          

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