                               T.C. Memo. 2016-161



                         UNITED STATES TAX COURT



            SCOTT SINGER INSTALLATIONS, INC., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 6393-14, 16617-14.                Filed August 24, 2016.



      James R. Monroe, for petitioner.

      Marissa R. Lenius, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      VASQUEZ, Judge: These consolidated cases are before the Court on two

petitions for redetermination of employment status filed pursuant to section 7436.1



      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
                                         -2-

[*2] By notices of determination of worker classification, respondent determined

that Richard Scott Singer was to be classified as petitioner’s employee for Federal

employment tax purposes for 2010 and 2011.2 Respondent determined that

petitioner was liable for: (1) employment taxes of $8,660 and additions to tax of

$4,515.12 for 2010; and (2) employment taxes of $8,048.70 for 2011. Mr. Singer,

on behalf of petitioner, timely filed petitions in response to the notices of

determination. We consolidated the cases for trial, briefing, and opinion.

      After concessions,3 the issues for decision are: (1) whether Mr. Singer

should be classified as petitioner’s employee for employment tax purposes for

2010 and 2011; and (2) whether petitioner’s payment of personal expenses on

behalf of Mr. Singer should be characterized as wages subject to Federal

employment taxes.

                                FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulations of

fact and the attached exhibits are incorporated by this reference.



      2
        For convenience, we use the term “employment taxes” to refer to Federal
income tax withholding, taxes under the Federal Insurance Contributions Act
(FICA--Social Security taxes), and taxes under the Federal Unemployment Tax
Act (FUTA--Social Security taxes).
      3
          Respondent concedes that petitioner is not liable for any additions to tax.
                                         -3-

[*3] Petitioner is an S corporation that was incorporated in Florida in 1981 and

reincorporated in Colorado in 1998. During the years at issue petitioner was a

Colorado corporation doing business in Florida. At the time the petition was filed,

petitioner’s principal place of business was 1505 Stellar Drive, Oviedo, Florida.

      Mr. Singer started Scott Singer Installations, Inc. (petitioner), in Miami in

1981. The business was primarily engaged in servicing, repairing, and modifying

recreational vehicles. Petitioner also sold Kraftmaid cabinets used in the

construction of homes. Mr. Singer was the sole shareholder and president of

petitioner and served as its sole corporate officer.

      After operating the business in Florida for many years, Mr. Singer moved it

to Colorado in 1999. Although it was a “rough start”, the operation quickly grew.

On several occasions petitioner was forced to move to larger locations to meet

increased demand.

      In order to fund petitioner’s growth, Mr. Singer began raising money from

various sources. In 2006 Mr. Singer established a $224,000 home equity line of

credit. In less than a year Mr. Singer had drawn on the entire line of credit and

advanced the funds to petitioner. In 2006 Mr. Singer also established an $87,443

line of credit by refinancing a home mortgage. He likewise advanced the entire

amount to petitioner within the same year. In 2008 Mr. Singer established a
                                        -4-

[*4] $115,000 general business line of credit and advanced all the funds to

petitioner. Mr. Singer also borrowed $220,000 from his mother and her boyfriend

and advanced all the funds to petitioner throughout 2007 and 2008. In sum, Mr.

Singer advanced a total of $646,443 to petitioner between 2006 and 2008.

Petitioner reported all of the advances as loans from shareholder on its general

ledgers and Forms 1120S, U.S. Income Tax Return for an S Corporation, but there

were no promissory notes between Mr. Singer and petitioner, there was no interest

charged, and there were no maturity dates imposed.4

      While petitioner was initially profitable, there was a decline in business in

2008. Mr. Singer made the decision to move petitioner to Florida in October 2009

so the Singers could be closer to family.

      Unfortunately, the business continued to struggle even after moving back to

Florida. Because Mr. Singer was unable to borrow from commercial banks, he

financed petitioner’s operations from 2009 through 2011 by borrowing an

additional $513,099 from his mother and her boyfriend and advancing the funds to




      4
        The loans were effectively back-to-back loans. Mr. Singer would
personally borrow money and then advance the funds to petitioner.
                                        -5-

[*5] petitioner.5 Mr. Singer also began charging business expenses to personal

credit cards.6

      Petitioner was not profitable during the years at issue. Petitioner reported

operating losses of $103,305 for 2010 and $235,542 for 2011. During the same

years petitioner paid $181,872.09 of Mr. Singer’s personal expenses by making

payments from its bank account to the Singers’ creditors.7 These payments made

on behalf of the Singers were treated on petitioner’s general ledger and Forms

1120S as repayments of shareholder loans. Petitioner did not deduct the payments

made on behalf of the Singers as business expenses.

      Mr. Singer worked full time for petitioner and occasionally employed a

service technician, two laborers, and an individual to help with petitioner’s

Internet sales. Petitioner filed Forms 940, Employer’s Annual Federal

Unemployment (FUTA) Tax Return, and Forms 941, Employer’s Quarterly


      5
         Again, there were no promissory notes executed between Mr. Singer and
petitioner, but petitioner reported the advances on its general ledgers and Forms
1120S as loans from shareholder.
      6
         At least $99,448.94 in business expenses charged to the Singers’ personal
credit cards in 2011 was unpaid. Petitioner reported the unreimbursed expenses as
loans from shareholder on its 2011 general ledger and Form 1120S.
      7
        Some of the Singers’ personal expenses that petitioner paid included
meals, groceries, retail purchases, car payments, and a home mortgage payment of
over $6,000 per month.
                                         -6-

[*6] Federal Tax Return, and paid employment taxes on wages paid to each

employee except Mr. Singer--petitioner did not report paying wages to Mr. Singer

during 2010 or 2011.

                                      OPINION

I.       Introduction

         Respondent determined that Mr. Singer was an employee of petitioner for

the years at issue and that the $181,872.09 in payments petitioner made on behalf

of Mr. Singer constituted wages that should have been subject to employment

taxes.

         We have jurisdiction under section 7436(a) to decide whether respondent’s

determination of worker classification is correct and to decide the proper amount

of employment tax under that determination. See also Ewens & Miller, Inc. v.

Commissioner, 117 T.C. 263, 267-268 (2001); Glass Blocks Unlimited v.

Commissioner, T.C. Memo. 2013-180. Therefore, we first consider whether Mr.

Singer was an employee of petitioner. If he was an employee, then we must also

determine whether the payments made on his behalf are wages subject to

employment taxes.
                                        -7-

[*7] II.     Employment Taxes

       A.    Worker Classification

       Employers are required to make periodic deposits of amounts withheld from

employees’ wages and amounts corresponding to the employer’s share of FICA

and FUTA tax. Secs. 6302, 6157; secs. 31.6302-1, 31.6302(c)-3, Employment

Tax Regs. “Employee” is defined for FICA and FUTA purposes to include “any

officer of a corporation” and “any individual who, under the usual common law

rules applicable in determining the employer-employee relationship, has the status

of an employee”. See secs. 3121(d)(1) and (2), 3306(i). An officer of a

corporation who performs more than minor services and receives remuneration for

such services is a “statutory” employee for employment tax purposes. See Joseph

M. Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C. 121, 126 (2002), aff’d,

93 F. App’x 473 (3d Cir. 2004); secs. 31.3121(d)-1(b), 31.3306(i)-1(e),

31.3401(c)-1(f), Employment Tax Regs. An officer can escape statutory employee

status only if he performs no services (or only minor services) for the corporation

and neither receives nor is entitled to receive any remuneration, directly or

indirectly, for services performed. See Veterinary Surgical Consultants, P.C. v.

Commissioner, 117 T.C. 141, 144-145 (2001), aff’d, 54 F. App’x 100 (3d Cir.
                                        -8-

[*8] 2002); secs. 31.3121(d)-1(b), 31.3306(i)-1(e), 31.3401(c)-1(f), Employment

Tax Regs.

      Petitioner does not object to respondent’s determination that Mr. Singer was

its employee for the years at issue, and the evidence clearly supports such a

finding. As president of the company, Mr. Singer was petitioner’s only officer.

Furthermore, he performed substantial services for petitioner. Accordingly, we

find that Mr. Singer was an employee of petitioner for the years at issue.

      B.     Wage Determination

      The next issue is whether petitioner’s payments made on behalf of Mr.

Singer should be characterized as wages subject to employment taxes. Petitioner

argues that the advances Mr. Singer made to it were loans and that payments made

on behalf of Mr. Singer represented repayments of those loans. Respondent

argues that the funds advanced to petitioner were contributions to capital and that

payments made on behalf of Mr. Singer were wages.

      The proper characterization of the transfers as either loans or capital

contributions is made by reference to all the evidence. See Dixie Dairies Corp. v.

Commissioner, 74 T.C. 476, 493 (1980); see also Herrera v. Commissioner, T.C.

Memo. 2012-308, at *13, aff’d, 544 F. App’x 592 (5th Cir. 2013). Petitioner bears

the burden of proving that the transfers were loans. See Rule 142(a); see also
                                         -9-

[*9] Dixie Dairies Corp. v. Commissioner, 74 T.C. at 493.8 Courts have

established a nonexclusive list of factors to consider when evaluating the nature of

transfers of funds to closely held corporations. 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).

      These factors serve only as aids in evaluating whether transfers of funds to

closely held corporations should be regarded as capital contributions or as bona

fide loans. Fin Hay Realty Co. v. United States, 398 F.2d 694, 697 (3d Cir. 1968).


      8
        Sec. 7491, which shifts the burden of proof to the Secretary in certain
circumstances, does not apply to employment tax disputes. See sec. 7491(a)(1).
                                          - 10 -

[*10] No single factor is controlling. Dixie Dairies Corp. v. Commissioner, 74

T.C. at 493. However, the ultimate question is whether there was a genuine

intention to create a debt, with a reasonable expectation of repayment, and whether

that intention comported with the economic reality of creating a debtor-creditor

relationship. Litton Bus. Sys., Inc. v. Commissioner, 61 T.C. 367, 377 (1973).

      Transfers to closely held corporations by controlling shareholders are

subject to heightened scrutiny, however, and the labels attached to such transfers

by the controlling shareholder through bookkeeping entries or testimony have

limited significance unless these labels are supported by other objective evidence.

E.g., Boatner v. Commissioner, T.C. Memo. 1997-379, 1997 WL 473162, at *3,

aff’d without published opinion, 164 F.3d 629 (9th Cir. 1998).

      Rather than analyze every factor on the debt-equity checklists, we confine

our discussion to those points we find most pertinent. In our analysis we look at

the relative financial status of petitioner at the time the advances were made; the

financial status of petitioner at the time the advances were repaid; the relationship

between Mr. Singer and petitioner; the method by which the advances were repaid;

the consistency with which the advances were repaid; and the way the advances

were accounted for on petitioner’s financial statements and tax returns. After

looking at all these criteria in the light of the other factors traditionally
                                        - 11 -

[*11] distinguishing debt from equity, particularly the intent factor, we believe Mr.

Singer intended his advances to be loans and we find that his intention was

reasonable for a substantial portion of the advances. Consequently, we also find

that petitioner’s repayments of those loans are valid as such and should not be

characterized as wages subject to employment taxes.

      We start by discussing evidence of Mr. Singer’s intention to create a debtor-

creditor relationship with petitioner and follow with a discussion of the extent to

which Mr. Singer had a reasonable expectation of repayment.

       First, we look to the fact that petitioner reported the advances as loans on

its general ledgers and its Forms 1120S.9 Petitioner’s balance sheets report Mr.

Singer’s advances as increases in loans from Mr. Singer each year. Additionally,

petitioner consistently reported the expenses it was paying on behalf of the Singers

as repayments of shareholder loans rather than reporting the payments as business

expenses. We believe this consistent reporting indicates Mr. Singer and petitioner

intended to form a debtor-creditor relationship and that petitioner conformed to

that intention. Second, petitioner’s payments on behalf of the Singers were


      9
        While we recognize that transfers by Mr. Singer as the controlling
shareholder (and the corresponding labels attached to such transfers) are subject to
heightened scrutiny, we believe Mr. Singer provided enough objective evidence to
overcome the higher standard.
                                       - 12 -

[*12] consistent regardless of the value of the services Mr. Singer provided to

petitioner. Many of the payments petitioner made were the Singers’ recurring

monthly expenses, including their home mortgage and personal vehicle loan

payments. The consistency of these payments, both in time and in amount, is

characteristic of debt repayments. Finally, and most importantly, the fact that

petitioner made payments when the company was operating at a loss strongly

suggests a debtor-creditor relationship existed. “A fundamental difference

between a creditor and an equity investor is that the former expects repayment of

principal and compensation for the use of money * * * whereas the latter

understands that the return of its investment, and any return on that investment,

depend on the success of the business.” David C. Garlock, Federal Income

Taxation of Debt Instruments 1039-1040 (6th ed. 2010). Consequently, we

believe Mr. Singer’s advances were intended to be loans because Mr. Singer was

repaid even when the business was operating at a loss and the repayments were

therefore not dependent on the success of the business.

      Now that we have found Mr. Singer and petitioner intended to form a

debtor-creditor relationship, the next question is whether Mr. Singer had a

reasonable expectation of repayment. When Mr. Singer advanced funds to

petitioner between 2006 and 2008, the business was well established and
                                       - 13 -

[*13] successful. Petitioner had been operating for many years, and the business

was growing at a rapid pace. Because the business was operating profitably and

showed signs of growth, we believe that Mr. Singer was reasonable in assuming

his loans would be repaid. Accordingly, we find petitioner and Mr. Singer

intended the advances to create debt rather than equity, that there was a reasonable

expectation at the time the initial advances were made that such advances would

be repaid, and that such intention comported with the economic reality of creating

a debtor-creditor relationship.10 See Litton Bus. Sys., Inc. v. Commissioner, 61

T.C. at 377. However, we cannot find that all of the advances were loans.

      While we believe that Mr. Singer had a reasonable expectation of repayment

for advances made between 2006 and 2008, we do not find that a similarly

reasonable expectation of repayment existed for later advances. When the

recession occurred in 2008 and petitioner’s business dropped off sharply, Mr.

Singer should have known that future advances would not result in consistent

repayments. When neither petitioner nor Mr. Singer was able to raise funds from

      10
          We recognize that Mr. Singer’s advances have some of the characteristics
of equity--the lack of a promissory note, the lack of a definitive maturity date, and
the lack of a repayment schedule--but we do not believe those factors outweigh the
evidence of intent. See Johnson v. Commissioner, T.C. Memo. 1977-436 (finding
that advances to corporation were loans even though there was no note, no specific
time fixed for repayment, and no interest, because intent of parties to create loan
was overwhelming and outweighed other factors).
                                       - 14 -

[*14] unrelated third parties, Mr. Singer must have recognized that the only hope

for recovery of the amounts previously advanced to petitioner was an infusion of

capital subject to substantial risk. After 2008 the only source of capital was from

Mr. Singer’s family and Mr. Singer’s personal credit cards. No reasonable

creditor would lend to petitioner. Accordingly, we find that advances made in

2008 and earlier were bona fide loans and that advances made after 2008 were

more in the nature of capital contributions. We also find that petitioner had a

sufficient outstanding loan balance at the time the repayments were made so that

loan repayments made during the years at issue are valid as such.

      In reaching our holding, we have considered all arguments made, and to the

extent not mentioned, we consider them irrelevant, moot, or without merit.

      To reflect the foregoing,


                                                      Decisions will be entered for

                                                petitioner.
