Opinion ID: 623171
Heading Depth: 3
Heading Rank: 2

Heading: Taxpayer Intent

Text: Although we think reasonableness is pertinent to the analysis, DEWPC urges that instead of focusing on reasonableness, the district court should have focused on DEWPC's intent. Taxpayer intent, like reasonableness, is usually part of a § 162(a)(1) compensation deduction analysis, although less commonly employed. See O.S.C. & Assocs. v. Comm'r, 187 F.3d 1116, 1120 (9th Cir.1999). As the language of § 162(a)(1) suggests, a deduction may be made if salary is both (1) reasonable and (2) in fact payments purely for services. Treas. Reg. § 1.162-7(a). The Ninth Circuit views this as a two-pronged test, the second prong of which requires proof of a compensatory purpose. Elliotts, Inc. v. Comm'r, 716 F.2d 1241, 1243 (9th Cir.1983). Usually, courts only need to examine the first prong, i.e., whether compensation was reasonable. Id. Indeed, [t]he inquiry into reasonableness is a broad one and will, in effect, subsume the inquiry into compensatory intent in most cases. Id. at 1245. However [i]n the rare case where there is evidence that an otherwise reasonable compensation payment contains a disguised dividend, the inquiry may expand into compensatory intent apart from reasonableness. Id. at 1244. This intent is subjective and difficult to prove. O.S.C. & Assocs., 187 F.3d at 1120. DEWPC turns our attention to Pediatric Surgical Assocs., P.C. v. Comm'r, 81 T.C.M. (CCH) 1474, 2001 WL 314335 (2001), to illustrate that intent is the determining factor for characterization purposes. Pediatric Surgical Assocs., P.C., involved a § 162(a)(1) compensation deduction where reasonableness was not at issue. Id. at . After reviewing Pediatric Surgical Assocs., P.C., we are not convinced it stands for the proposition that taxpayer intent controls in FICA tax characterization cases. [7] This is especially true because Pediatric Surgical Assocs., P.C., was a rare case where there is evidence that an otherwise reasonable compensation payment contains a disguised dividend. Elliotts, Inc., 716 F.2d at 1243. However, even if intent does control, after evaluating all the evidence, the district court specifically found Watson's assertion that DEWPC `intended' to pay Watson a mere $24,000 in compensation for the tax years 2002 and 2003 to be less than credible. We will not disturb this finding on appeal. See United States v. Bowie, 618 F.3d 802, 814 (8th Cir.2010) (recognizing credibility findings are virtually unreviewable on appeal (quotation omitted)). Therefore, the district court's finding as to DEWPC's intent was not clearly erroneous. DEWPC further argues that if the district court applied the principles of Pediatric Surgical Assocs., P.C., it would have limited the amount it characterized as wages to the amount of revenue each shareholder-employee personally generated, less expenses. In this case, like Pediatric Surgical Assocs., P.C., non-shareholder-employees also contributed to LWBJ's earnings. Thus, determining Watson's compensation is more complicated than if Watson had served as the only employee generating income for LWBJ. See Veterinary Surgical Consultants, P.C., 117 T.C. at 145 (determining that distributions of corporate net income to sole shareholder-employee were wages); see also Walter D. Schwidetzky, Integrating Subchapters K and SJust Do It, 62 Tax Law. 749, 799 (2009) (opining that in a pure services S corporation with a sole practitioner, nearly all of the corporation's income may likely be treated as remuneration for employment under FICA). Nevertheless, although we think evidence of shareholder-employee billings and collections may be probative on the issue of compensation, in view of all the evidence presented to the district court in this case, we see no error. Therefore, as noted earlier, because the district court applied the correct legal standard, we affirm its determination on Watson's FICA wages.