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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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