T.C. Memo. 2002-118
UNITED STATES TAX COURT
DENNIS KATZ, D.D.S., P.C., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8498-00. Filed May 14, 2002.
Elizabeth J. Atkinson, for petitioner.
Sandra M. Jefferson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
POWELL, Special Trial Judge: This is an employment status
determination case brought pursuant to section 7436.1 On May 9,
2000, respondent mailed to petitioner a Notice of Determination
Concerning Worker Classification under section 7436, in which it
was determined that, during the taxable years 1996 and 1997,
Dennis Katz was a statutory employee of petitioner and petitioner
1
Except with reference to sec. 530 of the Revenue Act of 1978,
Pub. L. 95-600, 92 Stat. 2885, section references are to the
Internal Revenue Code applicable to the years in question.
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was not entitled to relief from employment tax liability under
section 530 of the Revenue Act of 1978, Pub. L. 95-600, 92 Stat.
2885 (hereinafter section 530). On August 7, 2000, petitioner
filed a timely petition for review of respondent’s
determinations.
FINDINGS OF FACT
The facts are essentially undisputed and may be summarized
as follows. Petitioner is a professional corporation organized
pursuant to the laws of the Commonwealth of Virginia in 1971 for
the purpose of rendering “professional services as a practitioner
in the field of dentistry.” At the time the petition was filed,
petitioner’s principal place of business was located in Hampton,
Virginia. Dennis Katz (Dr. Katz) is a licensed dentist, and his
wife, Karen (Mrs. Katz), is a dental hygienist. Dr. Katz was and
is the sole shareholder of the petitioner’s stock and he was and
is the president. Mrs. Katz was and is the corporate secretary.
Petitioner could only operate its dental practice through its
duly licensed dentist, Dr. Katz. From 1977 through 1997, Dr.
Katz did not work for any other dentist or have any other dental
practice.
In 1981, petitioner and Dr. Katz entered into a management
agreement whereby Dr. Katz agreed to provide dental services for
and to manage the corporation. This agreement remained in effect
during the years 1996 and 1997. During these years, Dr. Katz
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spent 80 percent of his working time treating patients and the
remaining time was spent working on general administrative
matters of the practice. Dr. Katz made all of the medical and
administrative decisions and was responsible for the operation
and management of the corporation.
From its inception, petitioner employed a secretary and
various dental assistants and hygienists, one of whom was and is
Mrs. Katz. Dr. Katz supervised all the employees.
Petitioner maintained a corporate checking account, and all
funds from the dental practice were deposited into that account.
Dr. and Mrs. Katz had signatory authority over the corporate
account, and the corporate expenses were paid from that account.
When Dr. Katz was paid compensation, he wrote a check to himself
from the corporate account. Dr. Katz had personal bank accounts
into which these checks were deposited.
Petitioner’s corporate income tax returns and the Katzes’
joint Federal income tax returns were prepared by Bruce Carter,
C.P.A. Mr. Carter added the checks payable from the corporate
checking account to Dr. Katz to determine the “management” fees
paid to Dr. Katz, and the total amount of the management fees was
deducted as “other deductions” on the corporate returns. The
corporate returns showed no deductions for compensation of
officers.
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Dr. Katz prepared and filed employment tax returns (Forms
940 and 941) for the corporation. Petitioner did not treat Dr.
Katz as an employee for employment tax purposes. Petitioner
never issued Dr. Katz a Form 1099 or Form W-2, Wage and Tax
Statement, reflecting the payments made by the corporation to Dr.
Katz. On its 1996 and 1997 corporate returns, petitioner
deducted $93,803.78 and $115,884.75, respectively, as management
fees. Dr. Katz reported these amounts as income on Schedule C,
Profit or Loss From Business, on the joint returns filed for both
years.
The Internal Revenue Service audited the 1977 and 1980 joint
returns of Dr. and Mrs. Katz. The agent conducting the audit did
not have the authority to examine the corporate or employment tax
returns of the corporation. There is no record of petitioner’s
corporate or employment tax returns then being examined. In
2000, respondent determined that Dr. Katz was an employee of
petitioner during 1996 and 1997, and petitioner was liable for
employment taxes for both years.
The parties have stipulated that, if petitioner is
recognized as a corporate entity for tax purposes, Dr. Katz was a
“statutory employee” of petitioner from 1971 to and including
1997, and during these years he performed “substantial services”
for petitioner. There is also no dispute as to the amount of tax
due if section 530 does not apply.
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OPINION
1. The Statutory Background
Sections 3111 and 3301 impose taxes upon employers under the
Federal Insurance Contributions Act (FICA) and the Federal
Unemployment Tax Act (FUTA), respectively, commonly referred to
as employment taxes, based on the wages paid to employees. In
this case it is stipulated that, if petitioner’s corporate entity
is not disregarded, Dr. Katz was an employee for employment tax
purposes. See sec. 3121(d) and the regulations thereunder.2
Petitioner, however, argues that under section 530 of the Revenue
Act of 1978, Pub. L. 95-600, 92 Stat. 2763, 2885 (hereinafter
section 530),3 Dr. Katz should not be deemed to be an employee.
Section 530(a)(1) provides:
SEC. 530. CONTROVERSIES INVOLVING WHETHER INDIVIDUALS
ARE EMPLOYEES FOR PURPOSES OF THE EMPLOYMENT
TAXES.
(a) Termination of Certain Employment Tax Liability for
Periods Before 1980.-–,
(1) In general.–-If-–
(A) for purposes of employment taxes, the taxpayer
did not treat an individual as an employee for any
period ending before January 1, 1980, and
2
Sec. 3121(d)(1) defines an employee, inter alia, as “any
officer of a corporation”. See also sec. 3306(i).
3
Sec. 530 was amended by adding subsection (e). See Small
Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1122,
110 Stat. 1766. This amendment has no effect on the resolution
of this case.
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(B) in the case of periods after December 31,
1978, all Federal tax returns (including information
returns) required to be filed by the taxpayer with
respect to such individual for such period are filed on
a basis consistent with the taxpayer’s treatment of
such individual as not being an employee,
then, for purposes of applying such taxes for such period
with respect to the taxpayer, the individual shall be deemed
not to be an employee unless the taxpayer had no reasonable
basis for not treating such individual as an employee.
Under section 530(a) there are two separate questions–-viz,
whether the corporation filed all the returns required to be
filed, and second whether the corporation had a reasonable basis
for not treating Dr. Katz as an employee.
With regard to the first question, section 6041(a) requires,
inter alia, that
All persons engaged in a trade or business and making
payment in the course of such trade or business to another
person, of * * * compensations * * * of $600 or more in any
taxable year * * * shall render a true and accurate return
to the Secretary, under such regulations * * * as may be
prescribed by the Secretary, setting forth the amount of
such * * * income, and the name and address of the recipient
of such payment.
The term “person” includes corporations. Sec. 7701(a)(1).
Furthermore, under the regulations, petitioner was required to
file a Form 1099 reflecting the compensation paid to Dr. Katz.
Sec. 1.6041-1(a)(2), Income Tax Regs. Petitioner does not seem
to dispute that, if its corporate entity is recognized, it was
required to file Forms 1099. In all events, if the corporate
entity is recognized, consistent with the Court of Federal
Claims, we hold that petitioner would have been required to file
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those forms, and section 530 relief would not be available. See
Western Management, Inc. v. United States, 45 Fed. Cl. 543, 553-
554 (2000); see also General Inv. Corp. v. United States, 823
F.2d 337, 341 (9th Cir. 1987); Pariani v. Commissioner, T.C.
Memo. 1997-427.
Petitioner’s guiding argument is relatively simple and may
be stated as follows. If petitioner is not recognized as an
corporate entity for tax purposes, it was not required to file
Forms 1099, and Dr. Katz, then operating as a sole
proprietorship, would not have been an employee. Dr. Katz,
therefore, would not be an employee of his own proprietorship.
We turn to that question.
2. The Corporate Entity
As a general rule, a corporation is recognized as a distinct
taxable entity from its shareholders even though it has only one
shareholder who exercises total control over its affairs. Moline
Properties, Inc. v. Commissioner, 319 U.S. 436 (1943). This
recognition extends to corporations formed to perform personal
services rendered by its shareholders. Keller v. Commissioner,
77 T.C. 1014 (1981), affd. 723 F.2d 58 (10th Cir. 1983).4 There
are, however, situations where the corporate entity will be
4
The decision in Keller v. Commissioner, 77 T.C. 1014 (1981),
affd. 723 F.2d 58 (10th Cir. 1983), turns on an allocation of
income under sec. 482. For there to be a sec. 482 allocation,
however, there must be two or more recognizable entities.
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disregarded because it was an agent of the shareholder or it did
not perform the services or otherwise conduct business. See,
e.g., Commissioner v. Bollinger, 485 U.S. 340 (1988); Roubik v.
Commissioner, 53 T.C. 365 (1969). Petitioner relies on these
lines of cases. In other words, vis-à-vis Dr. Katz, the
corporation should not be regarded as having a separate
existence.
In Bollinger, the taxpayer formed a corporation with which
he entered into a written agreement that the corporation would
hold title to certain improved property as the taxpayer’s “agent
for the sole purpose of securing financing”. Commissioner v.
Bollinger, supra at 342. The corporation would convey the
property on demand and had no obligation to maintain the property
nor to perform any functions with respect to the management of
the property. The taxpayer performed all functions with respect
to the property. On his tax return, the taxpayer claimed
deductions relating to the property. The Government disallowed
the deductions contending that the property belonged to the
corporation and under Moline Properties, Inc. v. Commissioner,
supra, the deductions were attributable to the corporation. The
Supreme Court disagreed and held that on these facts the
corporation was an agent of the taxpayer.
The relevant facts in Roubik were summarized by the Court in
its opinion, as follows:
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[The corporation] appears to have existed * * * as a mere
set of bookkeeping entries and bank accounts. It did not
enter into any arrangements to provide the service of its
“employees” to any of the institutions, doctors, etc., for
whom * * * [the shareholder/doctors] provided services. It
did not own any equipment, incur any debts for rent, office
or medical supplies or services, or for salaries, except for
the salaries of the * * * [shareholder/doctors]. The only
“shared” expense, i.e., the only expense which was incurred
jointly by the * * * [shareholder/doctors] was $45 a month
for the time * * * [the] office secretary devoted to
maintaining records of income and expenses received and paid
by * * * [the corporation]. The maintenance of these
records for tax purposes appears to be the only real
business activity engaged in by the corporation. * * *
[Roubik v. Commissioner, supra at 379.]
If anything, this case is the antithesis of both lines of
cases. There is no evidence that Dr. Katz and petitioner
intended that the corporation’s role was that of an agent for Dr.
Katz. Furthermore, petitioner was not the “shell” corporation as
in Roubik v. Commissioner, supra, that provided no services. The
corporation maintained its own bank account, separate from the
accounts of Dr. and Mrs. Katz. It bought and put into service
equipment and claimed tax deductions resulting from equipment
that Dr. Katz used in performing services for the corporation.5
It had employees (other than Dr. Katz) who aided and assisted in
the services provided and paid employment taxes on and for these
employees. It prepared bills and collected payments for the
services rendered by the corporation. Under these circumstances
the corporate identity, vis-à-vis Dr. Katz, cannot be ignored.
5
See petitioner’s 1996 corporate return that shows the
purchase of a panoramic x-ray machine.
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In a somewhat similar vein, petitioner argues that it merely
was a conduit for payment from customers to Dr. Katz, and,
therefore, was not required to submit Forms 1099. See Marlar,
Inc. v. United States, 151 F.3d 962 (9th Cir. 1998); Deja Vu
Entertainment Enterprises of Minnesota, Inc. v. United States, 1
F. Supp. 2d 964 (D. Minn. 1998). In those cases the
taxpayers/corporations were in the adult entertainment business
and provided stage rental for dancers. Essentially, the
customers paid the dancers, and the dancers then paid the stage
rental to the corporations. The corporations did not file Forms
1099. The Government argued that the corporations were required
to file Forms 1099 on payments made by the corporations, and,
therefore, section 530 relief was not available. The courts held
that there were no payments, within the meaning of section 6041
and the regulations thereunder, made by the corporations to the
dancers.
We would be turning a blind eye to the facts if we were to
say that there were no payments from petitioner to Dr. Katz.
Petitioner billed the patients, and the patients paid petitioner.
Petitioner then paid Dr. Katz and the other employees for the
services they rendered.
As far as this record is concerned, petitioner has been
recognized by Dr. Katz for almost 30 years presumably in part
because of perceived benefits of Dr. Katz being petitioner’s
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employee. See, e.g., Keller v. Commissioner, 77 T.C. 1014
(1981). But, the corporate form may also have detriments, and we
would be reluctant to allow petitioner to turn on and off its
existence at will.6
Decision will be entered
for respondent.
6
The second part of the sec. 530 relief relates to a
taxpayer’s having a reasonable basis for treating the person to
whom the compensation was paid as other than an employee. In
this regard, under sec. 530(a)(2) a taxpayer is treated as having
a reasonable basis for not treating an individual as an employee
if the taxpayer relied, inter alia, on “a past Internal Revenue
Service audit * * * in which there was no assessment attributable
to the treatment (for employment tax purposes) of the individuals
holding positions substantially similar to the position held by
this individual”. Sec. 530(a)(2)(B). Petitioner suggests that
the audits of Dr. Katz’s returns would satisfy this requirement.
We, however, need not decide this issue.