Mulcahy, Pauritsch, Salvador & Co., Ltd. v. Commissioner of Internal Revenue

I.R.S. did not err in reclassifying as dividends $850,000 in consultant fees that were paid to shareholders of taxpayer-corporation and then imposing deficiency in corporation's substantial understatement on its income tax return. While corporation argued that instant consulting fees were properly classified as salary expenses to corporation, corporation did not satisfy independent-investor test where instant fees essentially reduced corporation's income to zero or less in two of three tax years in question. Moreover, record failed to support claim that consulting fees were compensation for shareholders' accounting and consulting services provided to corporation's clients.