                              In the

United States Court of Appeals
               For the Seventh Circuit

No. 08-2461

C ONSTRUCTION AND D ESIGN C O ., et al.,

                                              Petitioners-Appellants,
                                  v.


U NITED S TATES C ITIZENSHIP AND IMMIGRATION S ERVICES,

                                                Respondent-Appellee.


             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
              No. 07 C 1322—Robert M. Dow, Jr., Judge.



     A RGUED JANUARY 21, 2009—D ECIDED A PRIL 21, 2009




  Before P OSNER, FLAUM, and W OOD , Circuit Judges.
  P OSNER, Circuit Judge. The Immigration and Nationality
Act allows an alien, upon the petition of an employer,
to obtain a visa if the Department of Labor certifies that
no U.S. citizen is qualified for the work, 8 U.S.C.
§ 1153(b)(3)(A)(i), and if in addition the employer satisfies
the Department of Homeland Security that he can afford
to pay the alien’s wage. 8 C.F.R. § 204.5(g)(2). The addi-
2                                                No. 08-2461

tional requirement is intended to prevent the form of
immigration fraud in which an employer sponsors an
alien but does not intend to employ him. For that implies
that despite the Labor Department’s certification there
actually is no need for him in the U.S. economy, and,
moreover, that for this reason he may well end up unem-
ployed. See Department of Justice, United States Attorney’s
Office for the Southern District of Iowa, “Media Release: 11
Arrested, Indicted in Multi-State Operation Targeting Visa
and Mail Fraud,” Feb. 12, 2009, www.oig.dol.gov/public/
media/20090212visionsystemsindicment.pdf (visited
Mar. 18, 2009).
  The employer in this case, the Construction and Design
Company, is a small construction company organized as a
Subchapter S corporation. Such a corporation can choose
to have its corporate income pass through the corporation
without being subject to corporate income tax; instead
that income is taxed as individual income to the share-
holders. Gitlitz v. Commissioner, 531 U.S. 206, 209-10 (2001).
The purpose of Subchapter S is “to eliminate tax disad-
vantages that might dissuade small businesses from
adopting the corporate form and to lessen the tax burden
on such businesses.” Bufferd v. Commissioner, 506 U.S. 523,
524-25 (1993).
  Construction and Design consists of an owner and three
employees. Its gross receipts in the year in question were
almost $400,000 but its net income and net assets, accord-
ing to its tax return and its balance sheet, were close to
zero. The owner received officer compensation of about
$40,000 a year. The Department of Homeland Security
No. 08-2461                                                  3

ruled that the employer could not afford to pay the alien
in question, a Ukrainian carpenter, the $50,000-plus
salary that the employer said it wanted to pay him. The
employer and the alien sought judicial review in the
district court of the denial of the work visa, lost, and
appeal. (A complication, which we discuss at the end of
the opinion, is the presence of a third plaintiff-appellant—
an alien sought to be employed by a company that is not
a party to this suit.)
  We were thrown by the government’s brief. It argues
that when as in this case the employer’s net tax-
able income and net assets are smaller than the alien’s
projected salary, the employer must show either that the
salary is replacing a higher salary (or other cost) or that the
employer usually makes an adequate profit but has
encountered a “rough patch,” as in In re Sonegawa, 12 I & N
612 (Regional Comm. 1967). That is not the position of the
Department of Homeland Security, makes no sense, and
was renounced by the government’s lawyer in a post-
argument submission after he had taken some heavy
blows at the oral argument.
  The distinction that the government’s brief missed is
between accounting entities and cash flow. Accounting
entities such as depreciation and other reserves are in-
tended to provide information valuable to investors and
creditors (and the audited enterprise itself) and to mini-
mize tax liability. E.g., Resser v. Commissioner, 74 F.3d 1528,
1538 (7th Cir. 1996). They are not intended to tell a firm
whether to hire another employee or incur some other
operating expense. If the firm has enough cash flow, either
4                                                No. 08-2461

existing or anticipated, to be able to pay the salary of a
new employee along with its other expenses, it can
“afford” that salary unless there is some reason, which
might or might not be revealed by its balance sheet or
other accounting records, why it would be an improvident
expenditure. See generally Jae K. Shim & Joel G.
Siegel, Handbook of Financial Analysis, Forecasting, and
Modeling 84-85 (3d ed. 2007).
   The distinction between accounting profits, losses, assets,
and liabilities, on the one hand and cash flow on the
other is especially important when one is dealing with
either a firm undergoing reorganization in bankruptcy
or a small privately held firm; in the latter case, in order
to avoid double taxation (corporate income tax plus
personal income tax on dividends), the company might
try to make its profits disappear into officers’ salaries.
See Menard, Inc. v. Commissioner, No. 08-2125, 2009 WL
595587, at *1 (7th Cir. Mar. 10, 2009). The owners of a
Subchapter S corporation, however, have the opposite
incentive—to alchemize salary into earnings. A corporation
has to pay employment taxes, such as state unemploy-
ment insurance tax and social security tax, on the salaries
it pays. A Subchapter S corporation can avoid paying them
by recharacterizing salary as a distribution of corporate
income. To limit the ability of shareholder-employees to
minimize their salaries and thus the company’s employ-
ment taxes, the government requires that they be paid
“reasonable salaries.” Michael Schlesinger, Practical
Guide to S Corporations ¶ 102.9, pp. 5-6; ¶ 1302.10, p. 461
(4th ed. 2007).
No. 08-2461                                               5

   Because tax considerations drive a wedge between
accounting income and economic income, a company’s
tax returns are not a reliable basis for determining whether
the company can afford to hire another employee. A
profitable company might have no taxable income
because it was able to transmute income into salaries
(the closely held corporation that is not organized under
Subchapter S), or more taxable than real income because
it was able to transmute salaries into income (the
Subchapter S corporation). The Department of Homeland
Security realizes this, and while to save time it looks at a
firm’s income tax returns and balance sheet first, it
doesn’t stop there unless those documents make clear that
the salary of the alien whom the firm proposes to hire
would not imperil the company’s solvency. If that isn’t
clear, the firm has to prove by other evidence its ability
to pay the alien’s salary. O’Conner v. Attorney General of
the United States, 1987 WL 18243, at *1 (D. Mass, Sept. 29,
1987); Elatos Restaurant Corp. v. Sava, 632 F. Supp. 1049,
1054 (S.D.N.Y. 1986); In re X, 15 Immigration Rptr. B2-
22 (Admin. Appeals Unit Aug. 16, 1995); In re X, 13 Im-
migration Rptr. B2-166 (Admin. Appeals Unit Sept. 23,
1994); In re Sonegawa, supra, 12 I & N Dec. at 615. The
employer in our case concedes as it must that it bears the
burden of proof. 8 U.S.C. § 1361; River Street Donuts, LLC
v. Chertoff, 2007 WL 2259105, at *3 (D. Mass. Aug. 3, 2007);
Sitar Restaurant v. Ashcroft, 2003 WL 22203713, at *3
(D. Mass. Sept. 18, 2003); Elatos Restaurant Corp. v. Sava,
supra, 632 F. Supp. at 1054.
  The alien whom Construction and Design wanted to hire
had been working as an independent contractor for the
6                                                No. 08-2461

company. In that capacity he had been paid $23,000 less
than the salary the company says it wants to pay him as
an employee. It is not unusual for a firm to hire a person
first as an independent contractor in order to avoid
having to pay any benefits and then, if he works out, to
convert him to an employee. Fred S. Steingold, Legal Guide
for Starting and Running a Small Business 302 (10th ed. 2008);
Steven D. Strauss, The Small Business Bible 249-50 (2004).
But to pay him as an employee almost twice as much as
it paid him as an independent contractor—which under-
states the difference in cost to the employer, because of
employment taxes—makes one wonder whether Con-
struction and Design was concerned that the meagerness
of the compensation it was paying would undermine its
claim that no American was qualified to do the work
that the alien was doing for the company.
  Maybe, however, he was going to be working longer
hours as an employee. Even so, it is unclear where the
extra money he was going to be paid, plus employment
taxes (plus employee benefits, if any), would be coming
from. The company’s balance sheet does not include
noncash liabilities such as depreciation or loss
carryforwards that would cause the company’s cash
position—its resources for expansion—to be understated.
There is also no evidence that the firm had landed a
new contract requiring more staff (or that the alien work
longer hours) the cost of which the company would
finance by borrowing, or by raising capital in some other
way. The only “air” in the company’s income statement is
the owner’s $40,000 salary, and there is no suggestion
that he planned to cut his salary in half in order to be
No. 08-2461                                                   7

able to pay the higher cost of the alien as an employee.
And despite our earlier point that the owner of a
Subchapter S corporation has an incentive to recharac-
terize his salary as income, this company reports essen-
tially no income, whether income taxable as corporate
income or passed through to the shareholders to be
taxed as personal income to them.
  True, the Department of Homeland Security must not
take too static a view of a business firm’s decision to
purchase an additional input, whether of capital or labor.
“The balance sheet is only a snapshot of the employer’s
assets at a given moment and, thus, speaks only obliquely
to the employer’s ability to generate cash for payment of
wages at some later date . . . . [O]ne would expect an
employer to hire only workers whose marginal contribu-
tion to the value of the company’s production equals or
exceeds their wages.” Masonry Masters, Inc. v. Thornburgh,
875 F.2d 898, 903 (D.C. Cir. 1989). A new employee might
boost the firm’s income by more than his salary, and if so
the firm should be able to borrow the money it needs in
order to be able to pay that salary in advance of receiving
the income that the new employee will generate for
the firm; the firm might have a flood of orders and realisti-
cally anticipate that the revenue from filling them would
exceed the salary of the additional workers that it would
have to hire to be able to fill them. See In re Sonegawa, supra,
12 I & N Dec. at 615. That would actually be better evi-
dence of a bona fide hiring decision than that the net
income or net assets shown on its books exceeded the
additional salary; a rational firm does not hire a worker
who will not contribute to its bottom line, even if it has
8                                              No. 08-2461

enough money on hand to be able to do so. And
remember that the firm in this case is not seeking to
hire an extra worker but merely to change an existing
worker’s status from that of an independent contractor
to that of an employee. Maybe without that change in
status he would go elsewhere and leave the firm short-
handed, but there is no evidence of that, just as there is
no evidence that he would work more hours for this em-
ployer as an employee than as an independent contractor.
  We turn now to the complication created by the presence
of another alien as a party to this litigation, minus his
prospective employer. R.G. Construction, a company in
the same business as Construction and Design but unaffili-
ated with it, had filed a similar petition for a work visa,
on behalf of a custom woodworker named Ozlanski, but
had dropped out of the proceedings after the Admin-
istrative Appeals Unit in the immigration division of the
Department of Homeland Security upheld the denial of
the petition. R.G. was neither a plaintiff in the district
court case nor an appellant in our court. Ozlanski, how-
ever, was a plaintiff and is an appellant.
  One might doubt that Ozlanski has standing to sue in
federal court, since not he but R.G. applied for the work
visa and R.G. has not sought judicial review of the denial
of the application. However, Ozlanski submitted an
affidavit in the district court from the owner of R.G.
in which the owner states that he formed a successor
corporation to R.G. called JJL Restoration, which performs
the same work and occupies the same place of business
as R.G. did and intends to employ Ozlanski “as a custom
No. 08-2461                                                9

woodworker upon his receipt of employment authoriza-
tion.”
  Section 10 of the Administrative Procedure Act, 5 U.S.C.
§ 702, entitles any person “suffering legal wrong because
of agency action, or adversely affected or aggrieved by
agency action within the meaning of a relevant statute,” to
seek judicial review of the agency’s action. The affidavit
of R.G.’s owner suggests that Ozlanski is aggrieved by the
denial of R.G.’s petition for a work visa for him and
therefore has standing to seek judicial review. Ghaly v. INS,
48 F.3d 1426, 1434 n. 6 (7th Cir. 1995); Stenographic Ma-
chines, Inc. v. Regional Administrator for Employment &
Training, 577 F.2d 521, 527-28 (7th Cir. 1978); Taneja v.
Smith, 795 F.2d 355, 358 n. 7 (4th Cir. 1986). R.G. no
longer exists but in Taneja the petitioner had
informed the court that it was withdrawing the visa
petition—it no longer wanted to employ the alien—yet the
court held that this did not deprive the alien of standing,
though it went on to hold that the employer’s “changed
intentions” entitled the government to deny the alien a
visa. Id. at 358. In this case, too, there has been a change
in the alien’s employment prospects. Even if the govern-
ment should have granted R.G.’s petition, it does not
follow that it must grant JJL’s, for there is no information
that its economic circumstances are identical to its prede-
cessor’s. In any event, from the scanty information about
R.G. that can be scavenged from the record, its financial
situation appears to have been identical to that of Con-
struction and Design: nominal profits, nominal assets,
and a proposed $50,000-plus salary for Ozlanski if he
becomes an employee. So even if R.G. had sought judicial
review, the outcome would be the same.
10                                         No. 08-2461

  The district court’s affirmance of the denial of the
two petitions for work visas is
                                            A FFIRMED.




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