S corporation’s payments on its owner’s behalf are held not to be wages

The Tax Court held that an S corporation was not liable for employment taxes on payments in lieu of wages it made on behalf of its president and sole shareholder because the amounts repaid loans the owner had made to the company.

Facts: Richard Scott Singer formed Scott Singer Installations Inc., an S corporation, which modified, repaired, and serviced recreational vehicles in Florida and Colorado. As the business grew between 2006 and 2008, Singer advanced it funds from a home-equity line of credit and refinancing of his home, a general business loan, and a loan from his mother and her boyfriend—in all, more than $646,000. After the recession in 2008, however, the business declined, recording net operating losses for 2010 and 2011. Unable to borrow from banks, Singer infused another $514,000 from his family into the business and charged its expenses to his personal credit card.

Although Singer worked full time for the company, it paid him no salary for 2010 and 2011 but paid his home mortgage and expenses relating to his personal vehicle. The IRS determined Singer’s worker classification for the two years, finding that he was an employee of the company, which was liable for employment taxes relating to the payments it had made on his behalf. The company petitioned for a redetermination in Tax Court.

Issues: Scott Singer Installations did not object to a finding that Singer was its employee, leaving for decision whether the payments were wages or loan repayments. The IRS argued that the amounts advanced to the corporation were not bona fide loans but were contributions to capital and that the payments by the corporation on Singer’s behalf were wages. There were no promissory notes between Singer and the company, no maturity dates imposed, and no interest charged.

Holding: The Tax Court first examined whether Singer intended to create a debtor-creditor relationship with Scott Singer Installations, finding that he did. The company’s balance sheets consistently showed the advances as loans and reported its payments on his behalf as repayments rather than deducting them as business expenses. Also, the court noted, the company made the repayments consistently each month despite its losses. Next, the court examined whether Singer had a reasonable expectation of repayment. For advances between 2006 and 2008, when the business was expanding, Singer’s expectation of repayment was reasonable, it held. For advances after 2008, Singer should have known those amounts would not be repaid, and the court considered them contributions to capital. However, the previous advances created a sufficient loan balance to cover the repayment amounts at issue, and thus the amounts were bona fide loan repayments, the court held.

• Scott Singer Installations, Inc., T.C. Memo. 2016-161

—By Paul Bonner, a JofA senior editor.