Alexander Shokai, Inc. Edward Alexander Estelle Alexander v. Commissioner of Internal Revenue Service

Taxpayers Alexander Shokai, Inc., Edward Alexander and Estelle Alexander appeal the decision of the tax court denying them a redetermination of approximately $2 million in back taxes and penalties asserted by the Commissioner. The tax court had jurisdiction under 26 U.S.C. §§ 6213 , 6214 and 7442. We have jurisdiction pursuant to 26 U.S.C. § 7482 , and we affirm.

I. Facts

In the 1960’s, Gosen Co., Ltd., a Japanese manufacturer of tennis strings, granted Edward Alexander the right to sell its string as a wholesaler in the United States. The business began in the home of Mr. Alexander and his wife, Estelle Alexander. In the 1970’s the business was incorporated under the name E. Alexander, Inc. (EAI), a California corporation. Mr. Alexander was the sole stockholder of EAI.

In the early stages of the business, Mrs. Alexander performed various duties for EAI. After an office assistant was hired in the late 1970’s, Mrs. Alexander’s duties were sharply curtailed. She nevertheless received a salary averaging $36,000 per year in 1980, 1981 and 1982. The salary payments were deducted from EAI’s income.

In 1979, Gosen agreed to pay EAI a 10% commission on all sales made by Go sen to EAI…