S Corp. officer was employee.

• Author: Laffie, Lesli S.
• Position: Tax Court

The Tax Court held in Joseph M. Grey Public Accountant, P.C., 119 TC No. 5 (2002), that an accountant who was the president of his wholly owned S corporation was also its employee for employment tax purposes. The S corporation was thus liable for FICA and FUTA taxes under Secs. 3121(d)(1) and 33060).

Joseph M. Grey Public Accountant, P.C. (PC) was an S corporation accounting, bookkeeping and tax preparation firm. Joseph M. Grey (Grey), the president and sole shareholder, performed services for it. Grey had signatory power over the corporate checking account and withdrew to pay his bills as they arose.

PC reported $24,990 of ordinary income on its 1996 Form 1120S and on the Schedule K-1 issued to Grey. PC did not withhold or pay employment taxes. Grey reported the $24,990 as income on his own return.

Secs. 3111 and 3301 impose FICA and FUTA taxes on employers for wages paid to employees. For this purpose, an "employee" is defined in part as a corporate officer. There is an exception for an officer who does not perform services (or performs only minor services) and neither receives nor is entitled to receive remuneration.

PC argued that Grey was not its employee and that it properly passed its net income to Grey as the corporation's sole shareholder, under Sec. 1366. It also asserted that a corporate officer is not an employee for employment tax purposes unless he is an employee under the common law. It argued that Grey was not an employee under this test, because PC never exercised control over Grey in the performance of his services. The IRS countered that Grey was an employee, because he was an officer and performed substantial services on the company's behalf.

The Tax Court rejected all of PC's arguments. As to the S corporation passthrough theory, the court noted Veterinary Surgical Consultants, P.C., 117 TC 141 (2001), in which it refuted a similar argument (see...