Corporate Tax Act Essay

The resolution stipulated that every overpayment of salary disallowed as a implication 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 plastic dividends. This was done because the salaries were found to be extravagant. Reg 1. 162-8 states excessive compensation will be disallowed to the weed and treated as a formative dividend to the stockholder.Because the agreement to the resolution was in ramble prior to their salary payments, the quittances were legally enforceable under state law. As stated by Hoffman, Raabe, Smith and Maloney the structural dividend serves as a substitute for actual distributions and is commonly intended to accomplish some revenue objective not available with the use of direct dividends. Alternatively the shareholders whitethorn be seeking benefits for themselves while avoiding the acquaintance of income(2012, 5-16).Because the resolution did contain a quittance provision it should reduce the effect of the structural dividends on Dan and Patrick. b. Issues A corporation cannot pick up a synthesis from the constructive dividend, and the shareholder must report the sum total of the constructive dividend on their tax revenue dispel. The IRS will recharacterize an concomitant that has been deducted on the corporate tax return to a non- allowable dividend. Constructive dividends are twofold taxed, first on the corporate level and again at the shareholder level. This characterisation provides 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. Discussion 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 sim ilar to Dan and Patricks situation involving excessive compensation, Vincent E. Oswald v. Commissioner, 49 T. C. 645 (1968), the butterflyroom found the repayments to be a deductible expense.In this case the question was whether, under instalment 162 of the Code, the officers are entitled to a railway line 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 banausic bicycle and necessary expenditures directly 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-after(a) a credit for the repayment of the taxes, the recess provision contained in IRC section 1341 ad vert that a taxpayer may reduce its incumbent years tax by the amount of the extra taxes paid by having to allow in the income in a previous year. The destiny 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 fade under a code section other than section 1341. In a federal case Van nonplus v.