Michael D. and Christine R. Alexander - Page 5

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          Alexander’s work space.  Steven worked 378 hours and was paid               
          $4,000, for an hourly rate of $10.58.3                                      
               Although Steven worked only during the summer, petitioners             
          paid him the $4,000 over the course of the year.  For example,              
          from January through April 1998, petitioners made payments to               
          Steven totaling $481.  Petitioners treated these payments as wage           
          advances.  In November and December 1998, petitioners made                  
          payments to Steven totaling $2,526.  Petitioners paid the                   
          majority of the $4,000 directly to Steven, although a portion was           
          paid to third parties on his behalf.                                        
               Petitioners reported gross receipts of $1,301 for the                  
          seamstress business on Schedule C, Profit or Loss From Business,            
          attached to their 1998 tax return.  Petitioners claimed expense             
          deductions totaling $4,666, of which amount $4,000 represented              
          the payments to Steven.  There is no indication that petitioners            
          paid employment taxes on Steven’s earnings or that they issued              
          him a Form W-2, Wage and Tax Statement.  There is no indication             
          petitioners filed a Form 940, Employer’s Annual Federal                     
          Unemployment (FUTA) Tax Return, or Forms 941, Employer’s                    
          Quarterly Federal Tax Return.  Respondent disallowed the claimed            
          wage expense deduction in full.                                             

               3 Petitioners introduced a document they prepared titled               
          “Steven’s Hours”, which indicates that Steven earned $4,158, or             
          $11 per hour.  Petitioners did not explain the discrepancy                  
          between the earnings shown on this document and the amount they             
          actually paid Steven.                                                       

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