Friday, August 3, 2007

Tax Help: Attorney held to b e a statutory employee.

Court used substance ov er form principles to reach its conclusion that the attorney was a statutory employee

Western Management, Inc., Petitioner-Appellant v. Commissioner of Internal Revenue Service, Respondent-Appellee. U.S. Court of Appeals, 9th Circuit; 04-70795, April 12, 2006.

Unpublished opinion affirming in part and remanding in part the Tax Court, 85 TCM 1442, Code Sec. 3401]Employment taxes: Withholding of taxes on wages: Employee status. --

An attorney who was the sole shareholder and president of a C corporation that provided legal services was a statutory employee; consequently, amounts paid to the individual were wages subject to employment taxes, including income tax withholding. The individual exercised sole authority to make major corporate decisions, including paying creditors and signing checks and tax returns. The services performed by the individual on behalf of the corporation constituted "employment" under the term's broad definition. Although the individual owned all of the tangible assets of the law office and was an officer and shareholder of the corporation, this did not exclude him from being treated as an employee. Payments made to the individual were made from the corporate account and with money derived from the individual's performance of legal services. The payments were deducted on the return as officer compensation and, thus, were clearly wages for services rendered. To the extent that the individual paid income tax on the same wages subject to withholding, the IRS could not collect withholding taxes. The case was remanded to the Tax Court to determine what relief, if any, was available to the corporation.

Employee status. --

Amounts paid to a statutory employee and corporate officer for services performed for the corporation were wages subject to employment taxes, including income tax withholding. Although the individual paid self-employment taxes equivalent to the amount owed, the corporation as employer remained liable for the taxes. The individual could seek a credit or refund of the taxes paid under ¶39,080.28.[ Code Sec. 7491.

MEMORANDUM ** Petitioner-Appellant, Western Management, Inc. ("Petitioner"), appeals the decision of the United States Tax Court, upholding Respondent Commissioner of Internal Revenue's determination that Robert E. Kovacevich was an "employee" of Petitioner and, thus, that certain amounts paid to Kovacevich were "wages" subject to taxation under the Federal Insurance Contributions Act ("FICA") and the Federal Unemployment Tax Act ("FUTA"), as well as income tax withholding under 26 U.S.C. §3121(d)(1). The services that Mr. Kovacevich performed for Petitioner are virtually analogous to those performed by the attorney/officer in Van Camp & Bennion v. United States [ §3401(a). Petitioner wrote checks to Mr. Kovacevich, his wife (Yvonne Kovacevich), and their creditors directly from its corporate account, the monies in which were derived entirely from Mr. Kovacevich's provision of legal services. Most significantly, Petitioner deducted these payments on its tax returns as "officer compensation."5. Petitioner has waived, for the purposes of this appeal, the issue of whether Petitioner was otherwise relieved from tax liability (under both the FICA and FUTA) pursuant to Section 530 of the Revenue Act of 1978, Pub. L. 95-600, 92 Stat. 2885 (1978), as its briefs contain no mention of Section 530 or the relief it provides. See, e.g., Indep. Towers of Wash. v. Washington, 350 F.3d 925, 929 (9th Cir. 2003) ("[W]e review only issues which are argued specifically and distinctly in a party's opening brief.") (internal citation and quotations omitted).6. The Tax Court did not err in adopting Respondent's Rule 155 Calculations regarding the amount of "Social Security" (OASDI) tax assessed, as they were not in excess of the permissible wage base under 42 U.S.C. §430.7. The Tax Court did not err in adopting Respondent's Rule 155 Calculations regarding the amount of FICA taxes owed, regardless of whether Kovacevichs paid self-employment taxes equivalent to the amounts owed. Congress has provided a separate procedure by which an individual subsequently determined to be an "employee" of an outside entity may seek a credit or refund of self-employment taxes already paid. See 26 U.S.C. §3402(d), collect withholding taxes on those same wages from Petitioner. However, the record contains no findings from the Tax Court concerning the applicability of §3402(a).

We remand to the Tax Court for consideration of the narrow issue of whether 26 U.S.C. 99-2 USTC ¶60,346], 183 F.3d 1034, 1038 (9th Cir. 1999).AFFIRMED in part; REMANDED in part.* The Honorable Consuelo B. Marshall, Senior United States District Judge for the Central District of California, sitting by designation.** This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3.

Alvin S. Brown, Esq.
Tax attorney
703.425.1400 ex 106

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