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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