Watson v. Commissioner
United States Court of Appeals for the Eighth Circuit
668 F.3d 1008 (2012)
Watson (plaintiff, through his S corporation DEWPC) transferred his accounting-firm partnership interest into his single-employee corporation, which then paid him only $24,000 in reported wages while distributing over $200,000 in annual profit distributions for work performing 35-45 hours weekly of accounting services essentially as a firm partner; the government's expert valued his services at roughly $91,000 annually, and the district court found DEWPC had underreported his taxable wages, entering a tax deficiency judgment DEWPC appealed.
Whether money paid to a shareholder as dividend distributions may be deemed taxable wages if the shareholder's reported salary is unreasonably low.