Michael D. and Christine R. Alexander - Page 11

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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                   

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