Tax Court Overturns IRS, Rules Corporate Payments To Couple Are Loan Repayments To Wife, Not Taxable Dividends

The Tax Court ruled that payments made by a corporation to a married couple were repayments of a loan made by the wife.  In this case, the wife loaned money to a corporation, in which her husband was the sole shareholder.  This corporation later dissolved and a new corporation was later formed to continue the business.  The new corporation made payments of $95,000 and $70,000 to the wife, which the couple treated partly as taxable interest and partly as nontaxable repayment of the wife’s loan.  The IRS ruled that the payments were nondeductible constructive dividends to the husband.  The Tax Court ruled against the IRS, finding that while there was not a written assumption of the loan between the new and old corporations, the new corporation had purchased a software working model from the old corporation that had been developed with the money borrowed from the wife.  The Court found that if these payments were not considered repayments, then the new corporation would have been unjustly enriched.  As a result, the payments made to the wife were not treated as constructive dividends to her husband. Points of Interest

• When the customer does not pay, the company is left holding the bill for what the customer was obligated to pay.

• Though you may have properly completed the security agreement, it does not entitle you to completely abandon caution in your dealings.

• As with any sale or service, approach any transaction with a healthy degree of financial skepticism.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors