## Facts

- Joseph Radtke, S.C. was a Subchapter S professional corporation providing legal services; Joseph Radtke was its sole incorporator, director, shareholder, and principal employee.
- In 1982, Radtke performed substantially all legal services for the firm and was its only full-time employee; other workers were used only occasionally and part time.
- An employment contract set Radtke’s base salary at $0 (and not less than $0), and the corporation paid him no stated salary during 1982.
- During 1982, the corporation paid Radtke $18,225 labeled as “dividends,” typically when profits existed and Radtke needed funds, after corporate formalities declaring dividends.
- Radtke reported the payments as dividend income on his personal return; the corporation reported the amount on its S corporation return.
- The corporation did not file federal employment tax returns (Forms 941/940) and did not pay FICA or FUTA taxes on the distributions.
- The IRS determined the “dividends” were remuneration for services, assessed FICA and FUTA deficiencies (plus interest and penalties), and denied a refund claim after partial payment.
- The corporation filed a refund suit; both sides moved for summary judgment.

## Issues

1. Whether amounts distributed as “dividends” by an S corporation to its sole shareholder-employee who performed substantial services but received no salary constituted “wages” subject to FICA and FUTA.

## Decision

- The district court granted summary judgment for the United States and denied the corporation’s motion.
- The court held the 1982 “dividend” payments were, in substance, remuneration for Radtke’s services and therefore “wages” subject to FICA and FUTA.
- The corporation was liable for the assessed employment taxes, with applicable additions (including interest and penalties).
- The Seventh Circuit affirmed, approving the district court’s analysis and agreeing the payments constituted wages subject to FICA and FUTA.

## Legal Principles

- For FICA and FUTA purposes, “wages” broadly include remuneration for employment; the legal characterization turns on whether payments were made as compensation for services.
- Substance controls over the form or label attached to a payment; “dividends” may be reclassified as wages when they function as compensation.
- When a shareholder-employee performs substantial services and receives no salary (or an artificial nominal salary), distributions tied to corporate earnings and the employee’s work may be treated as wages for employment tax purposes.
- Summary judgment is appropriate when material facts are undisputed and the only dispute is the legal characterization of payments under the tax statutes.

## Conclusion

The court held that an S corporation cannot avoid employment taxes by paying a service-providing sole shareholder a zero salary while distributing corporate earnings as “dividends”; where the distributions operate as compensation for services, they are wages subject to FICA and FUTA.


Joseph Radtke, S.C. v. United States, 712 F. Supp. 143 (E.D. Wis. 1989)