Western Management, Inc. - Page 3

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          petitioner’s accounts receivable were deposited in the Seafirst             
          account.                                                                    
               Kovacevich worked 160 to 180 hours per month for petitioner            
          and performed all services necessary to generate gross receipts             
          on behalf of petitioner, including:  Paying creditors, hiring               
          employees, signing checks, determining employee compensation,               
          renewing petitioner’s malpractice insurance, and signing                    
          petitioner’s Federal tax returns.  No other person performed                
          legal services on behalf of petitioner.                                     
               Kovacevich received funds from petitioner as his needs arose           
          and was not compensated for his services at predetermined                   
          intervals.  In 1994 and the first quarter of 1995, respectively,            
          petitioner paid Kovacevich $132,000 and $33,250.  Petitioner                
          issued checks to Kovacevich, his wife, and their creditors (e.g.,           
          Nordstrom, Teneff Jewelry, Fit and Hollywood, and National Golf),           
          and Kovacevich informed petitioner’s accountant and tax return              
          preparer, Bob Moe & Associates (Moe), that the payments were                
          draws.  Petitioner classified the payments as “loans” on its                
          corporate ledgers and did not file Forms 1099-MISC, Miscellaneous           
          Income, relating to the payments.  Petitioner also paid                     
          Kovacevich’s law license renewal fees, office expenses, bar dues,           
          and health insurance premiums and deducted most of these expenses           
          on its corporate income tax returns.                                        







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Last modified: May 25, 2011