SIX PENNSYLVANIA S-CORPS LOOSE CASE

TO CLASSIFY SHAREHOLDERS AS NON-EMPLOYEES

THE FIRMS:

NU LOOK DESIGN, INC.

MIKE J GRAHAM TRUCKING, INC.

WATER PURE SYSTEMS, INC

SPECIALTY TRANSPORT AND DELIVERY SERVICES, INC.

SUPERIOR S-CORPS

VETERINARY SURGICAL CONSULTANTS, INC

A Tax Court Judge dismissed the argument that S-Corporation shareholders aren't employees. The court rejected any suggestion that the S-Corp's passing through of its income to shareholders precluded the finding of an employer / employee relationship between the S-Corps and Corporate Officers. The Judge rejected the S-Corp's argument that "employee" under section 3121(c) must be construed as taking into account the common law rules for determining the existence of an employer / employee relationship. The court noted that each paragraph of section 3 12 1 (c) affords a separate basis for deeming one engaged to perform services as an employee.

The Judge noted that the S-Corps failed to establish a lack of control over Corporate Officers. Thus, the application of section 3121(c)(1) isn't limited by considerations pertaining to Corporate Officer's status as S-Corporation shareholders or under common law. Section 3121(d)(1) and regulations specify that corporate officers are classified as employees if they perform more than minor services and receive, or are entitled to receive, remuneration. The Judge found that Corporate Officers activities for the S-Corps met the criteria and that they were its employees for employment tax purposes. The court also concluded that the S-Corps failed to establish a reasonable basis for not treating Corporate Officers as an employee and that the S-Corps didn't fall into the section 530 safe harbors. Thus, relief from the employment tax liability isn't available to the S-Corps.