Income Tax: Corporations–Incorporated Professional Service Organization Taxable as a Corporation; Kintner Regulations Held Invalid–Empey v. United States

Lawrence G. Empey, a lawyer, was employed by the Drexler and Wald Professional Company, an association of attorneys that had incorporated in 1961 pursuant to the Colorado Corporation Code and rule 265 of the Colorado Rules of Civil Procedure. Empey began his employment with Drexler and Wald in March 1965, and in November of the same year he acquired ten shares (ten per cent) of the outstanding capital stock of the corporation. On his 1965 federal income tax return, he reported income consisting of his salary as an employee of the company for ten months and ten per cent of the undistributed net income of the company for the two-month period in 1965 in which he had been a stockholder. After paying his taxes, Empey sued in federal district court for a refund of the taxes attributable to his share of the undistributed net income. The government maintained that under the tests of the Kintner regulations Drexler and Wald was a partnership, rather than a corporation, for federal tax purposes, and therefore that Empey was not entitled to the refund. The United States District Court for Colorado held that Drexler and Wald was a corporation for federal tax purposes, and thus that Empey was entitled to a refund. The Kintner regulations are invalid, and, even if the regulations were valid, Drexler and Wald possessed all of the characteristics necessary for taxation as a corporation under the regulations.