Corporate Tax Act Essay

The resolution stipulated that any overpayment of salary disallowed as a import by the IRS would be repaid to the Osprey Corporation. In late 2010 during an audit by the IRS, $200,000 of Patricks compensation, and $150,000 of Dans compensation were recharacterized as constructive dividends. This was through with(p) because the salaries were found to be excessive. Reg 1. 162-8 utters excessive compensation leave alone be disallowed to the fraternity and handle as a constructive dividend to the shareowner.Because the agreement to the resolution was in place prior to their salary payments, the repayments were legally enforceable under state law. As stated by Hoffman, Raabe, Smith and Maloney the constructive dividend serves as a substitute for actual distributions and is usually intended to accomplish some assess objective not available through the use of direct dividends. instead the shareholders whitethorn be seeking benefits for themselves while avoiding the recognition of income(2012, 5-16).Because the resolution did hold off a repayment provision it should reduce the effect of the constructive dividends on Dan and Patrick. b. Issues A corporation cannot take a deduction from the constructive dividend, and the shareholder must report the amount of the constructive dividend on their tax return. The IRS will recharacterize an item that has been deducted on the corporate tax return to a non-deductible dividend. creative dividends are double taxed, first on the corporate level and over again at the shareholder level. This characterization results in the IRS denial of the deduction on he corporate level. To determine how the repayment by Dan and Patrick should be hardened for tax purposes we must determine whether the repayment can, or should be treated as a deduction or as a credit. c. intervention In 162, it states compensation is deductible only to the extent that it is reasonable and is in fact payment purely for services. In a case like to Dan and Patricks situation involving excessive compensation, Vincent E. Oswald v. Commissioner, 49 T. C. 645 (1968), the court found the repayments to be a deductible expense.In this case the question was whether, under class 162 of the Code, the officers are entitled to a argument expense deduction for the schedule year 1968 for the salaries repaid by them to the corporation (Vincent E. Oswald. 49 T. C. 645 (1968)). The Section 1. 162-1 of the Income Tax Regulations provides, in part, that average and necessary expenditures directly connected with or pertaining to the taxpayers job or business are deductible from gross income as business expenses (Rev. Rul. 69-115, 1969-1 CB 50 IRC Sec(s). 162).According to the case, the court found that a deduction for ordinary and necessary business expenses would be allowed. If Dan and Patrick sought a credit for the repayment of the taxes, the relief provision contained in IRC section 1341 suggest that a taxpayer may reduce its current years tax by the amount of the extra taxes paid by having to include the income in a previous year. The sine qua non that a taxpayer be entitled to this deduction has two subsets. One, there must be a deduction as the result of the restoration of income, and two, the deduction must occur under a code section another(prenominal) than section 1341. In a federal case Van pull v.