Corporate Tax Act Essay

The resolution stipu late(a)d that any overpayment of salary disallowed as a subtraction 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 done because the salaries were strand to be excessive. Reg 1. 162-8 states excessive compensation will be disallowed to the jackpot and treated as a constructive dividend to the shareholder.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 tax objective not available through the use of direct dividends. Alternatively the shareholders may be seeking benefits for themselves while avoiding the recognition of income(2012, 5-16).B ecause the resolution did contain a repayment furnish 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 corporeal tax return to a non-deductible dividend. Constructive dividends are double taxed, first on the corporate level and 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 treated for tax purposes we must determine whether the repayment can, or should be treated as a deduction or as a credit. c. raillery 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 similar to Dan and Patricks situation involv ing 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 section 162 of the Code, the officers are authorize to a business expense deduction for the calendar 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 ordinary and necessary expenditures like a shot connected with or pertaining to the taxpayers trade 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 apprize that a taxpayer may reduce its current years tax by the amount of t he extra taxes paid by having to include the income in a prior year. The requirement 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 other than section 1341. In a federal case Van Cleave v.