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Commissioner, T.C. Memo. 1986-444; sec. 1.162-7(a), Income Tax
Regs. Compensation meeting those requirements is deductible even
if the employer is a parent and the employee a child. Eller v.
Commissioner, 77 T.C. 934, 962 (1981); Hamdi v. Commissioner,
T.C. Memo. 1993-38, affd. without published opinion 23 F.3d 407
(6th Cir. 1994). When a familial relationship is involved,
however, the Court closely scrutinizes the transaction. Denman
v. Commissioner, 48 T.C. 439, 450 (1967); Hamdi v. Commissioner,
supra. Section 262(a) generally disallows deductions for
personal, living, or family expenses. A normal supposition when
payments are made to dependent children or when items are
purchased for them is that the money or items are in the nature
of support and thus nondeductible under section 262. Holtz v.
Commissioner, T.C. Memo. 1982-436.
In deciding whether payments to a child are deductible, we
examine all the facts and circumstances. Eller v. Commissioner,
supra. Facts that militate against the deductibility of such
payments include: (1) Failing to pay employment taxes7 and file
7 The employment tax sections of the Internal Revenue Code
are in subtitle C. Secs. 3111 and 3301 impose taxes on employers
under the Federal Insurance Contributions Act (FICA) and the
Federal Unemployment Tax Act (FUTA), respectively, based on wages
paid to employees. See Images in Motion, Inc. v. Commissioner,
T.C. Memo. 2006-19. Sec. 3101 imposes a tax on employees based
on their wages paid, which the employer is required to collect
under sec. 3102. Id. For purposes of FICA, employment does not
include service performed by a child under the age of 18 in the
employ of his father or mother. Sec. 3121(b)(3)(A). For
(continued...)
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