Watson v. Commissioner

668 F.3d 1008 (8th Cir. 2012)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

To access this section all you need to do is click here and register.

Facts

In 1983, P became a Certified Public Accountant (CPA). Worked at Ernst & Young. While at Ernst & Young, P began specializing in partnership taxation. After leaving Ernst & Young, P obtained a 25% interest in Larson, Watson, Bartling & Juffer, LLP (LWBJ), an accounting firm. P received no salary when the firm first began operations because the entity did not have money to pay him. In 1996, P incorporated David E. Watson, P.C. Watson (PC), and transferred his individual 25% interest in LWBJ to PC. PC replaced P as a partner in LWBJ. P was PC's sole officer, shareholder, director, and employee. PC employed P, but P exclusively provided his accounting services to LWBJ. In both 2002 and 2003, PC distributed $24,000 to P as employment compensation. LWBJ partners made the determination that LWBJ had sufficient cash flow where it could distribute $2,000 a month to each partner, regardless of the seasonality of the business. PC, received $203,651 from LWBJ as profit distributions for 2002. In 2003, PC, received $175,470 as profit distributions from LWBJ. After PC paid P's salary and other expenses, it distributed all remaining cash to P as dividends. The Internal Revenue Service (D) investigated PC and determined that it underpaid FICA. PC paid the delinquent tax, penalty, and interest and sought a refund from D denied the claim. PC sued the United States in district court. The United States counterclaimed, seeking to recover employment taxes, penalties, and interest that remained unpaid for 2002 and 2003. The district court held a bench trial. D's expert testified that the market value of Watson’s accounting services was $91,044 per year. D's expert viewed P as a de facto partner of LWBJ. The court determined that the reasonable amount of P's remuneration for services performed totaled $91,044. It rendered a tax deficiency judgment against PC, which included unpaid employment taxes, penalties, and interest in the amount of $23,431.23. PC appealed.