The Tax Court has found that a payment from an S corporation to its sole shareholder was not a transfer of funds to be held in a fiduciary capacity (Rogers v. Commissioner, Dec. 58,819(M), TC Memo. 2011-277). The court found it was a distribution to be included in the shareholder’s gross income.
The taxpayer managed several business entities, including an S corporation and a limited liability company (LLC). The taxpayer deposited half of a payment due to the LLC in the S corporation’s bank account. The S corporation subsequently paid the taxpayer a distribution of $732,000, and deducted $513,500 as the cost of legal and professional fees due to the taxpayer. Meanwhile the taxpayer reported the $513,500 on his and his wife’s joint return, but not the remaining $218,500, which the taxpayer claimed to be a distribution to a fiduciary to be held in trust.
The Tax Court held that the unreported amount distributed to the taxpayer was taxable and not a distribution to a fiduciary. The court rejected the taxpayer’s argument state law required the taxpayer to hold funds as trustee, stating that the S corporation was not subject to the state law. Furthermore, the taxpayer held and used the funds without restriction.