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dog-breeding business. See Haeder v. Commissioner, T.C. Memo.
2001-7 (taxpayer’s failure to issue wife a Form W-2 militated
against the deductibility of payments to her); see also Martens
v. Commissioner, T.C. Memo. 1990-42, affd. 934 F.2d 319 (4th Cir.
1991).
On the issue of how the daughters’ compensation was
determined, Mrs. Alexander’s testimony was inconsistent. She
initially testified that petitioners predetermined they could pay
each daughter approximately $4,250 for the year. She later
testified, however, that petitioners paid each daughter $7 an
hour. It is difficult to believe that each daughter earned
exactly $4,250 for the year unless that amount was predetermined.
Furthermore, we note that $4,250 was the amount of the standard
deduction in 1998. See sec. 63(c); Rev. Proc. 97-57, sec. 3.04,
1997-2 C.B. 584, 586. As a result, each daughter could earn up
to $4,250 without having to pay Federal income tax. We conclude
that petitioners paid their daughters a flat amount that was
determined at the beginning of the year, rather than an hourly
rate. This fact weighs against the deductibility of the
payments. See Furmanski v. Commissioner, T.C. Memo. 1974-47.
As mentioned supra, the daughters generally did not receive
cash from petitioners. In addition, the daughters received
advances when they needed to make purchases. We have held that
similar arrangements indicate a lack of correlation between the
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