In order to avoid the flow-through of examination adjustments, the Taxpayer in Mowry v Commissioner[1] attempted to argue that an S corporation, in which he was a minority shareholder, had ceased to be a valid S Corporation. The Taxpayer argued that disproportionate distributions to the majority shareholder (i.e., not the Taxpayer) over several years created…
In Garcia v. Commissioner [1], the Taxpayers were a married couple embroiled in litigation over alleged corporate fraud by an international bank specialist. The specialist’s fraud devalued the couple’s minority interest in a “South African exploration and gold mining investment company” (“R&E”). The Taxpayers along with other investors funded most of the expensive litigation from…
In Goldsmith v. Commissioner, T.C. Memo. 2017-20 (link) the Tax Court held that the payments from the shareholder’s S corporation were not wages. The Tax Court reasoned that the payments to the taxpayer constituted a non-taxable return of capital. The court reached this conclusion even though the taxpayer did not draw a salary for the…
Takeaway: While S corporations can be an effective means to reduce FICA taxes, the form of the arrangement must be consistent with the taxpayer’s intended reporting position(s). The S corporation, not the S corporation’s employee-shareholder, must be in control of the receipt of income in order shift income from the shareholder’s personal income tax return…
