Watson v. Commissioner

Facts

In 1982, David Watson graduated from college with a bachelor’s degree. In 1983, Watson became a Certified Public Account (CPA) and later obtained a master’s degree in taxation. After leaving Earnest & Young, Watson obtained a 25% interest in an accounting firm known as Larson, Watson, Bartling & Eastman. He testified that he received no salary when the firm first began operations. Eventually, the firm reemerged as Larson, Watson, Bartling & Juffer, LLP (LWBJ). In 1996, Watson incorporated a business entity known as David E. Watson, P.C. Watson transferred his individual 25% interest in LWBJ to DEWPC, and thereafter DEWPC replaced Watson as a partner in LWBJ. Watson served as DEWPC’s sole officer, shareholder, director and employee. In 2002 and 2003, DEWPC distributed $24,000 to Watson as employment compensation. In addition to salary, Watson, through DEWPC, received $203,651 from LWBJ as profit distributions for 2002. The Internal Revenue Service investigated DEWPC and determined that it underpaid certain employment taxes pursuant to FICA. On April, 2007, DEWPC paid the delinquent tax, penalty and interest and sought a refund from the IRS, which refused to pay.