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Henderson’s personal expenses by petitioner were compensation or
constructive dividends to him. If the payments are constructive
dividends, the amounts are not deemed compensation to Mr.
Henderson. Thus, the payments would not be wages for purposes of
FICA and FUTA taxes. Respondent contends that the payment of the
personal expenses represented compensation to Mr. Henderson, and
therefore petitioner is liable for the related employment taxes.
Whether a corporation’s payment of a shareholder’s personal
expense is a constructive dividend or compensation is a question
of fact. See Goldstein v. Commissioner, 298 F.2d 562, 566 (9th
Cir. 1962), affg. T.C. Memo. 1960-276. Regardless of how an
employer chooses to characterize payments made to employees, “the
true analysis is whether the payments are for remuneration for
services rendered.” Spicer Accounting, Inc. v. United States,
918 F.2d 90, 93 (9th Cir. 1990).
When a corporation’s earnings are due to the efforts of its
employees, it is entirely appropriate for the corporation to make
substantial payments to its employees. Langer v. Commissioner,
T.C. Memo. 1990-268. In Smith v. Commissioner, supra, this Court
determined that the payment of the shareholder’s personal
expenses constituted compensation payments instead of
constructive dividends. The Court was persuaded by the fact that
the corporation did not pay a salary to the shareholder and that
the taxpayer’s earnings arose solely from the shareholder’s
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