Another S-Corp Shareholder Loses on the ‘Salary Versus Distribution’ Question

Pigs get fat, and hogs get slaughtered – an age old maxim proven, once again, in the recent Tax Court Decision in the Glass Blocks Unlimited case.

Seems the corporation made a bunch of payments to its President and sole shareholder, treating none of those payments as salaries or wages, filing no Forms 941 and no Forms W-2 for the years 2007 or 2008, notwithstanding the facts that the shareholder was the corporation’s only officer, its sole full time worker, who performed substantially all of the work necessary to operate the business, including processing orders, collecting payments, arranging shipment of goods, managing inventory, and handling customer relations.  According to the Court, “His services generated all of petitioner’s income.”

In concluding that payments to the shareholder were more correctly “wages,” the Court also didn’t buy the arguments advanced that certain of the corporate distributions represented repayment of loans from the shareholder because, among other things, no promissory notes had been prepared and interest on the “loans” was not required to be paid.