Facts
PC is a professional corporation engaged in general practice law. D, E and F are equal shareholders and they act as its directors and principal officers. In 2008, D as the attorney on record was engaged to represent the Estate of Smith in a wrongful death action against Interdistrict Telephone Company. The parties in this case entered a settlement, which provided a lump sum payment to the estate and provided for an attorneys fee in the amount of $3,000.000 payable to D. D received the attorneys fee retained $1,000,000 and disbursed $1,000,000 to E and the other $1,000,000 to F. D reported receipt of $3,000,000 on Schedule C of his Form 1040 and claimed a deduction of $2,000,000, which represented the total amount disbursed to E and F. …show more content…
1977), IRS determined deficiencies in the petitioner’s income taxes. Hess started selling bottled juices brought that he bought from Home Juice Company. His work included promotion and distribution. He later entered into distribution agreements with Home Juice Company. He incorporated in order to eliminate his personal liability in tort. The corporation then performed contractual obligations imposed upon Hess. Home Juice Company continued to make rebate payments to Hess and did not report these payments on its tax returns. IRS determined that the purchase rebates constituted income and should be taxed as income. The court noted that income should be taxed to the person who earns it. The application of this rule in the case was difficult because the individuals had performed sales services and received compensation for some time but then creates a corporation and continues with the same tasks. Determining who earns the income requires establishing whether the individual performs the tasks in an individual capacity or as a corporate officer. The court treated the payments to Hess as income earned. When Hess created the corporation, he discharged his obligations. The corporation stepped into Hess shoes in conducting its