S Corp: Repayment of Loan vs. Wages

One frequent S Corporation exam issue is whether payments to an owner should be classified as a loan or classified as wages to the owner. Most Revenue Agents look for loan documents to prove a loan existed. However, that is not the correct application of the law. When this issue comes up, practitioners can point to the recently released Scott Singer Installations, Inc. v. Commissioner, TC Memo 2016-161.


In the case, loan documents did not exist, but the court still found there was a loan. Instead the court looks at several factors.

"Such factors include: (1) the names given to the documents that would be evidence of the purported loans; (2) the presence or absence of a fixed maturity date; (3) the likely source of repayment; (4) the right to enforce payments; (5) participation in management as a result of the advances; (6) subordination of the purported loans to the loans of the corporation’s creditors; (7) the intent of the parties; (8) identity of interest between creditor and stockholder; (9) the ability of the corporation to obtain financing from outside sources; (10) thinness of capital structure in relation to debt; (11) use to which the funds were put; (12) the failure of the corporation to repay; and (13) the risk involved in making the transfers. Calumet Indus., Inc. v. Commissioner, 95 T.C. 257, 285 (1990); see also In re Lane, 742 F.2d 1311, 1314-1315 (11th Cir. 1984)."

Here, no factor is controlling. In Scott Singer Installations, Inc., the taxpayer was able to show he contributed money to the company in its early stages and these contributions were actually loans. The court looked to see if he consistently treated these payments as a loan (which most taxpayers do), and if the repayments were consistent and did not vary based on the amount of work done.

This is a great case to point at when you are having troubles with debt vs. wages on S Corporations and partnerships.


Relevant Citations: TC Memo 2016-161