26 C.F.R. § 1.162-8
Treatment of excessive compensation
The income tax liability of the recipient in respect of an amount ostensibly paid to him as compensation, but not allowed to be deducted as such by the payor, will depend upon the circumstances of each case. Thus, in the case of excessive payments by corporations, if such payments correspond or bear a close relationship to stockholdings, and are found to be a distribution of earnings or profits, the excessive payments will be treated as a dividend. If such payments constitute payment for property, they should be treated by the payor as a capital expenditure and by the recipient as part of the purchase price. In the absence of evidence to justify other treatment, excessive payments for salaries or other compensation for personal services will be included in gross income of the recipient.
Notes of Decisions
Cited in 13
cases (2 in the last 5 years), 1966–2022 · leading case: New York State Ass'n for Retarded Child., Inc. v. Hugh L. Carey, Individually & as Governor of the State of New York, 711 F.2d 1136 (2d Cir. 1983).
New York State Ass'n for Retarded Child., Inc. v. Hugh L. Carey, Individually & as Governor of the State of New York, 711 F.2d 1136 (2d Cir. 1983). “See 26 C.F.R. § 1.162-8 (1982). . We note that in a recent case in which the Cravath firm applied for fees under section 1988 the firm requested compensation at only $60 per hour, a rate well below the firm’s average billing rate.”
Kennedy v. Comm'r, 72 T.C. 793 (Tax Ct. 1979). “To determine the appropriate tax treatment of the excess payments in the hands of the recipient, James, we must determine the nature of those payments under the facts presented.”
O.S.C. & Assocs., Inc., D.B.A. Olympic Screen Crafts v. Comm'r of Internal Revenue, 187 F.3d 1116 (9th Cir. 1999). “26 CFR § 1.162-8 (emphasis added). Although this Circuit has not addressed in a published opinion whether a portion of a purported compensation payment is nevertheless deductible, notwithstanding that the payment was not made solely for a compensatory purpose, the Fifth Circuit…”
RTS Inv. Corp. v. Comm'r, 53 T.C.M. 171 (Tax Ct. 1987). “Although we do not specifically characterize the amounts as "dividends" (because Hilt Truck Line was a subchapter S corporation), we *121 must agree that the funds channeled through Western Services were in the nature of dividends, i.e., distributions of earnings and profits.”
Garrison v. Comm'r, 52 T.C. 281 (Tax Ct. 1969). “162-7(b)(1) and 1.162-8, Income Tax Regs. 5 We perceive no valid reason for not applying the rationale of those regulations in a situation involving the liquidation of a corporation.”
Nicath Realty Co. v. Comm'r, 25 T.C.M. 1260 (Tax Ct. 1966). “Regarding the fair market value of the apartment as a constructive dividend means that the Hummels are entitled to an additional credit against tax for dividends received under section 34 as effective during the years in issue.”
Alexander Shokai, Inc. v. Comm'r, 63 T.C.M. 1870 (Tax Ct. 1992). “Alexander owned no stock in EAI, respondent determined the payments were properly characterized as constructive dividends to petitioner, EAI's sole stockholder.”
Clayton v. Comm'r, 42 T.C.M. 670 (Tax Ct. 1981). “If it is determined that salaries are excessive and the excessive payments bear a close relationship to the stockholdings of the officers or employees, it would then seem likely that the salaries are not paid wholly for services rendered, but that the excessive payments are a…”
Mortex Mfg. Co. v. Comm'r, 67 T.C.M. 2412 (Tax Ct. 1994). “-- The income tax liability of the recipient in respect of an amount ostensibly paid to him as compensation, but not allowed to be deducted as such by the payor, will depend upon the circumstances of each case.”
Mekhaya v. Eastland Food Corp. (Md. Ct. Spec. App. 2022). “26 C.F.R. § 1.162-8 . Various courts have looked similarly to the circumstances of the payment, and not necessarily its characterization by the company, in determining whether a “salary” paid to a shareholder was instead a disguised dividend.”
Mekhaya v. Eastland Food Corp. (Md. Ct. Spec. App. 2022). “26 C.F.R. § 1.162-8 . Various courts have looked similarly to the circumstances of the payment, and not necessarily its characterization by the company, in determining whether a “salary” paid to a shareholder was instead a disguised dividend.”
Royal Crown Bottling Co. v. Comm'r, 46 T.C.M. 1570 (Tax Ct. 1983). “He worked hard and managed the corporation's business in an outstanding manner. 2 *200 *201 The dispute between the parties, the corporation and Mr.”
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