Jean Watson Case Summary

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Watson was an owner of a S-corporation that owned 25% of LWBE. Watson received money through his S-corp. for his services provided to LWBE. Watson had a very low salary with LWBE and received most of his wages through the S-corp. Watson claimed that the money from the S-corp. was dividends so he shouldn’t pay FICA taxes on the dividend portion of his income. The issue was since his salary was 70000 dollars below what the court said was the fair values for his services. It was decided that the dividends he was receiving though his S-corp. was just a salary and therefor subject to FICA taxes.

2) Why would companies try to make profits disappear in to officer salaries or to alchemize salary into earnings?
Companies would do this to avoided having to pay as much tax. Making profits go into salaries is …show more content…
7) What if your opinion is that the $24,000 salary from the last question was too low from, you informed Watson and he will not change his stance? What then?
You must cut ties with him. The reason is that you cannot in good faith prepare the tax return and know that it is free from errors. That means you cannot and should not prepare the return for them because it will damage your reputation and it would be illegal.

8) Does Circular 230 give a CPA the right to practice laws in limited cases?
No, according to section 10.32 of circular 230, nothing in Circular 230 gives people that are not members of the bar to practice law.

9) What is a “frivolous” tax position?
It is when a tax claim is put forth that has no real substance or evidence to stand on its own. it is just a position that will never be able to be defended.

10) Does the IRS have the authority to reclassify income from dividends to wages?

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