Corporate Payments to Spouses Under Revenue Ruling 83-48

The Internal Revenue Service (IRS) provides guidance on the tax treatment of payments made by a corporation to the surviving spouse of a deceased shareholder-employee. The core issue is whether such a payment qualifies as a non-taxable gift to the spouse or as taxable compensation. This classification, which hinges on the corporation’s intent, has direct tax consequences for both the business and the recipient.

Determining the Nature of the Payment

The IRS evaluates several factors to determine the intent behind a corporation’s payment to a deceased shareholder-employee’s surviving spouse. The analysis is based on principles from the Supreme Court case Commissioner v. Duberstein, which requires a gift to stem from “detached and disinterested generosity.” The conclusion rests on a collective analysis of the facts and circumstances.

A primary consideration is whether the payment was made to the surviving spouse or the deceased’s estate. Payments directed to the spouse suggest personal consideration, such as sympathy or concern for their welfare. A payment to the estate, however, suggests a settlement of obligations owed to the deceased employee, making it compensatory in nature.

The existence of a pre-established plan or legal obligation is another factor. If the corporation had a formal policy, employment contract, or a consistent past practice of making such payments, the IRS is likely to view the payment as deferred compensation. The absence of any such binding obligation supports the argument that the payment was a voluntary and spontaneous act, which is a characteristic of a gift.

The board of directors’ deliberations are closely scrutinized, particularly whether they considered the financial needs of the surviving spouse. If the board assessed the spouse’s financial situation and tailored the payment amount accordingly, it strengthens the case for a gift. Conversely, if the payment amount was determined by a formula related to the deceased’s salary or years of service, it points toward the payment being compensation for past performance.

The relationship between the payment and the surviving spouse’s stock ownership in the corporation is also analyzed. If the payment amount is proportional to the spouse’s shareholdings, it may be characterized as a constructive dividend rather than a gift or compensation. A payment made to a surviving spouse who holds no stock, or one that is not in proportion to their holdings, is less likely to be viewed as a disguised dividend distribution.

Finally, the IRS reviews the reasonableness of the deceased employee’s past compensation and the corporation’s dividend history. If the deceased was undercompensated for their services during their tenure, a payment to the spouse could be interpreted as a final settlement of that unpaid compensation. A consistent history of the corporation paying dividends may weaken the argument that a payment is a gift, as it could be seen as a substitute for a formal dividend declaration.

Required Corporate Documentation

To substantiate the intended tax treatment, a corporation must maintain meticulous records. The primary documentation is the board of directors’ resolution authorizing the payment. This document should state the purpose and intent behind the funds, providing evidence for the company’s position.

The board resolution should contain specific language that aligns with the desired tax outcome. If the payment is intended as a gift, the resolution should articulate that it is being made out of respect for the deceased, concern for the spouse’s welfare, and generosity, explicitly stating it is not for services rendered. If intended as compensation, the resolution should detail that the payment is for prior services performed by the deceased employee that were inadequately compensated.

Corporate meeting minutes serve as supporting evidence for the board’s resolution. These minutes should document the discussion and deliberation that led to the decision, including the specific factors that were considered. For example, if the board evaluated the financial needs of the spouse, the minutes should reflect this conversation, providing a contemporaneous record of the board’s motivations.

Beyond the resolution and minutes, the corporation should have supporting financial records readily available. These documents help corroborate the statements made in the board’s resolution. Key records include the deceased employee’s salary and bonus history to address the reasonableness of past compensation, as well as the company’s dividend payment records to counter any suggestion that the payment is a disguised dividend.

Tax Reporting and Compliance

After the corporation determines the nature of the payment and properly documents its intent, specific tax reporting procedures must be followed. These actions ensure compliance with federal tax law and align with the position established in the corporate records.

If the payment is classified as compensation, the corporation treats it as a deductible business expense on its income tax return, such as Form 1120 for a C corporation. The company must also issue Form 1099-MISC, Miscellaneous Information, to the surviving spouse, reporting the payment in Box 3 as “Other Income.” If the payment is treated as a gift, the corporation cannot deduct the payment as a business expense, except for a maximum of $25 under the rules for business gifts.

For the surviving spouse, the tax treatment mirrors the corporation’s reporting. If the payment is received as taxable compensation, as indicated on Form 1099-MISC, the spouse must report it on their personal income tax return, Form 1040, and pay the applicable income tax.

If the payment is classified and received as a gift, it is excluded from the surviving spouse’s gross income under Section 102 of the Internal Revenue Code. Consequently, the spouse does not report the amount on their Form 1040 and owes no income tax on the funds received. This underscores the importance of the corporation’s initial determination and documentation, as it directly impacts the tax obligations of both the company and the spouse.