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Wednesday, February 26, 2003


Mike J Graham was President, 60% shareholder, and did all work of any kind done for Mike J Graham Trucking, Inc., an S Corporation. The other two shareholders were his wife and daughter. Graham Inc. paid Graham no salary and distributed no dividends during the years at issue. Graham did, however, dip into corporate accounts as needed for personal use. This case involves the lack of employment taxes paid Graham Inc. Graham Inc. insists that Graham was an independent contractor, on the theory that the corporation had no control over his duties. Obviously, Graham Inc. lost. To claim 60% shareholder Graham had no control over President Graham is silly, and, as Tax Court rightly points out, an attempt to avoid the consequences of his chosen form of business. And anyway, corporate officers are statutory employees.

Somewhat more interesting was the discussion regarding section 530, which allows employers to avoid liability for employment taxes if they did not treat their employees as employees and they had a reasonable basis for doing so. One of three safe harbor reasonable bases is reliance on, among other things, judicial precedent. Graham Inc. had claimed that their position was supported by Texas Carbonate Company v. R.L. Phinny. Tax Court said (1) this was not reasonable because Texas Carbonate was not good law and did not support their position anyway, and (2) Graham Inc. did not �rely� on this case in treating Graham as an employee because the evidence did not show Graham (and therefore Graham Inc.) had heard of the case before filing their petition with Tax Court. This last bit a tax professionals� employment act. It does not matter if case law shows that your wrong position was reasonable. You still need to have had a tax professional tell you about the case ahead of time.

I suspect their may have been an argument here that Graham Inc. was a sham entity, and that Graham actually should have paid self-employment taxes, but that this did not serve either the IRS�s or Graham�s interest to suggest, and Tax Court, ruling on employment taxes, did not have the jurisdiction to bring up.

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