Glass Warehouse, Inc., T. C. Memo. 2026-111, filed 11/2/26, wanted to deduct the payments it made to its subcontractors, who just happened to be its sole shareholders (who were also on the payroll as employees).

True, the subcontractors managed every aspect of the business, except groundskeeping and maintenance, T. C. Memo. 2026-111, at p. 6. And the shareholder-subcontractors did report their subcontractor income on their individual returns and paid employment taxes thereon. Judge Cathy (“NCY = No Cognomen Yet”) Fung observes that “(H)ow a shareholder reports an item on a personal tax return does not control how the corporation reports that same item on its own tax return because a corporation is generally recognized as a tax entity separate from its shareholders.” T. C. Memo. 2026-111, at p. 7.

Glass Warehouse has another problem. ” Petitioner presented no testimony or other evidence regarding the nature, contractual agreement, amount, or provider of the purported subcontractor services. It failed to produce any business records, payroll records, contracts, invoices, Forms 1099, or other reliable documents in support of its position.” T. C. Memo. 2026-111, at p. 7.

Glass Warehouse’s trusty attorneys try the reclassification move, to no avail.

“Petitioner’s counsel argued that the reporting of subcontractor expenses was a case of worker misclassification and that section 3509 provides a remedy such that there is no loss to the Treasury for an employer’s failure to pay withholding taxes. Section 3509 determines an employer’s liability for its failure to withhold employment taxes ‘by reason of treating [an] employee as not being an employee.’ When that happens, the employer is liable for an increased percentage of the withholding taxes and Social Security taxes required to be deducted or imposed. I.R.C. § 3509(a). Section 3509 does not turn amounts that would otherwise not be subject to withholding tax, such as contractor expenses, into deductible Form W–2 wages just because the Code provides a mechanism to hold an employer liable in an actual worker misclassification situation.” T. C. Memo. 2026-111, at p. 7, footnote 8.

And hiring a separate CPA firm to do one’s taxes is insufficient by itself to constitute good faith reliance. No evidence what the CPAs were told.