In Uncategorized on 01/04/2012 at 16:40

OR, Employer’s Evasion Is No Defense to Employee

This is the lesson Judge Cohen teaches Tom Henk (not to be confused with Tom Hanks, co-star of the captioned 2002 movie), who is caught, and hit for self-employment tax, in Thomas G. Henk, Jr., a Section 7463 “Just Sayin’”, 2012 T. C. Sum. Op. 2, filed 1/4/12.

Tom worked for an outfit called Dealer Financial Services, who sacked him on June 13 of the year at issue. Tom got a $10K check from Franklin Financial Corp., a “sister” of Dealer, although Tom never worked, or did anything else, for Franklin. The $10K was supposedly severance pay Dealer owed Tom.

Franklin filed a Form 1099-MISC on Tom, but Tom never reported the $10K and claimed he never got the money, although as trial approached he conceded receipt. As Doctor Johnson famously remarked, “Depend upon it, Sir, when a man is to be hanged in the morning, it concentrates his mind wonderfully.”

Dealer, of course, never paid FICA, FUTA or Medicare/Medicaid taxes on anything but the wage money Tom earned up to the date they canned him. And Franklin never paid such taxes on the post-canning $10K.

Tom claimed at trial that the $10K was wages, upon which Dealer should have paid FICA, FUTA, and all that jazz, and that Franklin was a conduit that Dealer was using to escape its tax liability. But Tom couldn’t prove that on the record, although it does look mighty suspicious. Judge Cohen points out that the issue of whether Dealer or Franklin has to pay any part of the FICA, FUTA, etc., that’s owed on the $10K is not before the Court.

But Tom is before the Court; IRS says the $10K is nonemployee compensation upon which SE tax is due, and Judge Cohen opines simply:  “Petitioner’s suspicions concerning the motivation of his former employer are irrelevant to the taxability of the amount that he received.” 2012 T. C. Sum. Op. 2, at p. 3.

IRS concedes the 92.35% SE computation and 50% AGI deduction (the year at issue was before the self-employed give-up in the current, 2011, law, so the AGI break is 50%, not 57.51%, on the $10K), and Tom gets stuck for the rest.

Takeaway– If the check is suspicious, protest it then, not after IRS nails you. Or maybe drop  a Form SS-8 ,“Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding”, on Federal or whoever is the gamester.

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