David E. Watson, P.C. v. United States

757 F. Supp. 2d 877 (2010)

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David E. Watson, P.C. v. United States

United States District Court for the Southern District of Iowa
757 F. Supp. 2d 877 (2010)

Facts

David E. Watson was an accountant and the sole shareholder and employee of David E. Watson, P.C. (DEWPC) (plaintiff), a professional corporation that elected to be taxed as an S corporation. DEWPC provided accounting services to Larson, Watson, Bartling & Eastman (LWBE). Watson did not practice accounting outside of his work for LWBE through DEWPC. DEWPC paid Watson a stated salary of $24,000 for two years of work, on which it paid federal employment taxes. DEWPC also distributed to Watson approximately $175,000 in profits attributable to its work for LWBE. DEWPC characterized these distributions as loans and dividends and did not pay employment taxes on them. The United States (government) (defendant) recharacterized the profit distributions as wages and assessed additional employment taxes against DEWPC. DEWPC paid a portion of the newly assessed tax and sued the government for a refund. At trial, an Internal Revenue Service (IRS) governor presented evidence that the market value of Watson’s services to DEWPC and LWBE were approximately $91,000 per year.

Rule of Law

Issue

Holding and Reasoning (Pratt, C.J.)

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