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incorporation in 1991, petitioner has not reported paying Graham
a salary or wages for work he performed on behalf of petitioner.
Petitioner did not file a Form 941, Employer’s Quarterly
Federal Tax Return, for any quarter in 1995, 1996, or 1997 or a
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax
Return, for 1995, 1996, or 1997. Throughout this period,
petitioner did not treat any individual as an employee.
The Grahams’ Tax Reporting
For each of the years 1995, 1996, and 1997, Graham and
Mrs. Graham filed a joint Form 1040, U.S. Individual Income Tax
Return. On these returns, Graham and Mrs. Graham reported as
ordinary income from “Rental real estate, royalties,
partnerships, S corporations, trusts, etc.” $10,696.21,
$27,234.33, and $19,035.05 for 1995, 1996, and 1997,
respectively. Attached Schedules E, Supplemental Income and
Loss, characterize the foregoing amounts as nonpassive income
from Schedules K-1.
The Notice of Determination
Prior to the audit underlying the instant case covering
1995, 1996, and 1997, respondent neither audited petitioner for
employment tax purposes nor challenged petitioner’s treatment of
Graham as other than an employee. Thereafter, on February 23,
2000, respondent sent to petitioner the notice of determination
at issue in this proceeding. The notice was based on a
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