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During the period in issue, petitioner rendered services to
Veterinary Orthopedic Services, Ltd. (Veterinary Orthopedic).
Sadanaga performed such services on behalf of petitioner pursuant
to a service contract between petitioner and Veterinary
Orthopedic dated January 1, 1992. Sadanaga provided consulting
and surgical services on petitioner’s behalf to other
veterinarians at the Veterinary Orthopedic business office, at
the offices of the individual veterinarians, and at petitioner’s
office (as maintained in Sadanaga’s home). During 1997 and 1998,
Sadanaga also worked approximately 25 to 30 hours per week as an
employee of Bristol-Meyer Squibb Co., which relationship had
begun in 1990.
In 1997 and 1998, petitioner did not maintain any type of
business bank account. Rather, all moneys earned on behalf of
petitioner were deposited into the joint account of Sadanaga and
his wife, Amy Sadanaga. Sadanaga used funds maintained in this
account to pay both business expenses of petitioner and his
personal expenses as the need arose. Petitioner did not make
regular payments at fixed times to Sadanaga for his services.
Petitioner’s Tax Reporting
Petitioner timely filed Forms 1120S, U.S. Income Tax Return
for an S Corporation, and related schedules, for each of the
years 1997 and 1998. Petitioner reported ordinary income from
its trade or business of $214,896.40 and $316,484.05 for 1997 and
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