Nu-look Design, Inc. - Page 4




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          home improvement business.  Stark controlled the day-to-day                 
          activities of petitioner.                                                   
               During 1996, 1997, and 1998, all moneys that were paid on              
          accounts receivable of petitioner were deposited into                       
          petitioner’s checking account.  Stark was the only person with              
          signature authority on petitioner’s account.  Petitioner did not            
          make regular payments at fixed times to Stark for his services.             
          Rather, Stark obtained funds from petitioner’s bank account to              
          pay himself as his needs arose.  Petitioner neither classified              
          any payment as a dividend nor distributed any dividends to                  
          shareholders from 1996 through 1998.                                        
          Petitioner’s Tax Reporting                                                  
               Petitioner filed Forms 1120S, U.S. Income Tax Return for an            
          S Corporation, and related schedules, for 1987 through 1995.  On            
          these returns, petitioner did not report treating Stark, or any             
          other individual, as an employee of petitioner.                             
               Petitioner filed a Form 1120S for each of the years 1996,              
          1997, and 1998.  Petitioner reported ordinary income from its               
          trade or business of $10,866.14, $14,216.37, and $7,103.60 for              
          1996, 1997, and 1998, respectively.  Petitioner claimed no                  
          deduction either for compensation of officers or for salaries and           
          wages.  Schedules K-1, Shareholder’s Share of Income, Credits,              
          Deductions, etc., attached to the returns show $10,866.14 for               
          1996, $14,216.37 for 1997, and $7,103.60 for 1998 as the pro rata           






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