Edward W. and Edith M. Arnold - Page 4




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         reference to EAPC, on documents accounting for expenses,                     
         payments, and sales commissions connected with her real estate               
         practice associated with Coldwell Banker.                                    
              Mr. Arnold was the 100-percent owner of Pacific Controller,             
         Inc. (PCI).  Mr. Arnold operated PCI as a vehicle for his                    
         accounting and tax preparation business.  Mr. Arnold assigned to             
         PCI the payments he received from customers for his personal                 
         accounting services.  PCI has never paid Mr. Arnold wages or a               
         salary.  Mr. Arnold had complete control over whether PCI paid               
         and/or reported wages to him.  PCI has never withheld payroll                
         taxes on the money it distributed to Mr. Arnold.  There was no               
         contract between Mr. Arnold and PCI giving PCI the right to                  
         control Mr. Arnold’s performance of services.                                
              EAPC and PCI are S corporations.  Petitioners reported                  
         nonpassive income (distributions of net income after expenses)               
         from EAPC and PCI on Schedules E, Supplemental Income and Loss,              
         of their 2002 and 2003 joint Federal income tax returns.  Mr.                
         Arnold prepared the 2002 and 2003 tax returns for petitioners,               
         EAPC, and PCI.  Petitioners reported zero wage income on their               
         2002 and 2003 joint Federal income tax returns.                              













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