Water-Pure Systems, Inc. - Page 6




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          respondent reclassified as wages to Ridge 50 percent of the                 
          nonpassive income distributed by petitioner.  For 1997 and 1998,            
          respondent also reclassified as wages the Form 1099-MISC                    
          “nonemployee compensation” paid to Ridge.                                   
               It is stipulated that, if the Court decides that Ridge is to           
          be classified as an employee for Federal employment tax purposes            
          for all periods in 1996, 1997, and 1998, the amounts of taxes due           
          and owing are as set forth in the notice of determination.                  
                              ULTIMATE FINDINGS OF FACT                               
               Ridge, as president of petitioner, performed more than minor           
          services and received remuneration therefor.                                
               Petitioner did not have a reasonable basis for failing to              
          treat Ridge as an employee during the years in issue.                       
                                       OPINION                                        
          I.  Statutory and Regulatory Provisions                                     
               A.  Subtitle C of the Internal Revenue Code                            
               Subtitle C of the Internal Revenue Code governs payment of             
          employment taxes.  In particular, sections 3111 and 3301 impose             
          taxes on employers under FICA (pertaining to Social Security) and           
          FUTA (pertaining to unemployment), respectively, based on wages             
          paid to employees.  The term “wages” as used in these statutes              
          generally encompasses “all remuneration for employment”.  Secs.             
          3121(a), 3306(b).  “Employee” is defined for purposes of FICA               
          taxes in section 3121(d), and, with modifications not germane               






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