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Ward v. Commissioner (T.C. Memo. 2021-32)

On March 15, 2021, the Tax Court issued a Memorandum Opinion in the case of Ward v. Commissioner (T.C. Memo. 2021-32). The primary issues presented in Ward were whether the petitioner properly reported income, whether the petitioner was entitled to the insolvency exception to IRC § 108 to avoid income inclusion for discharge of indebtedness income, and whether the petitioner was just completely full of shit. She was.

Personal Note

I sympathize with the petitioner to a certain extent.  Attorneys of our generation have substantial debt. That is where my sympathy ends.  Outright fabrication of tax returns is not acceptable behavior, lady.  Get your ish together.

Background

The petitioner is an attorney.  She went to law school.  Whilst there, she failed to attend the course on ethics. (I’m just spitballing here.) She practiced in a firm, and then deciding that it wasn’t for her, started her own firm (an S corporation).  Owning her own firm, she realized, escaped the strictures of reporting “wages” and “income” and “reality.”

Employment Taxes

“FICA” taxes are a percentage of wages and help fund Social Security and Medicare. IRC § 3101(a), (b). Employers are subject to the same tax. They too must pay tax on their employees’ compensation to the government to help fund Social Security and Medicare. IRC § 3111(a), (b). Employers report wages paid and employment taxes withheld and owed on those wages on Forms 941. An employer is liable for both its own portion and the employee’s portion of employment taxes. IRC § 3403; Treas. Reg. § 31.3403-1.

The petitioner’s firm didn’t “pay” employment taxes on the wages it paid to the petitioner because it was “officer’s compensation” and not actually wages.  Ultimately, she gave this argument up at trial—likely because it wasn’t actually founded in any basis of fact or law.  (Again, just spitballing.)

Income from S Corporation—Not Distributions from S Corporation

Income from an S corporation is not the same as distributions from an S corporation. See IRC § 1366(a). Distributions have nothing to do with income. Distributions are capital that owners remove from their corporations, while income is, among other things, gains and profits. An S corporation shareholder may pay tax on her corporation’s earnings, keep the money in the corporation till a later year, and then pay it to herself—that would be a distribution. But in the year the corporation earns that income, its owner must report and be taxed on it.

(T.C. Memo. 2021-32) Ward v. Commissioner

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