Southwestern Federal Taxation Answers Chapter 19

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Chapter 19.

10. Distributing automobile A would trigger a taxable gain of $7,000 for Crimson, whiledistributing C produces a nondeductible loss of $5,000. To preserve the loss on C and avoid recognizing a gain on A, Crimson should consider selling C and then distributing cash to the second shareholder. Crimson should also distribute automobile B because there will be no gain on distribution and no nondeductible loss.10.

14.

a. The determination of the reasonableness of compensation paid to an employee who is not a shareholder but is related to the sole owner of the corporate-employer should be made in the same manner as that for salary paid the shareholder-employee. The degree of relationship between the sole owner of the corporation and the employee should be considered initially to determine if, in essence, the salary could be considered as having been paid to the owner. If so, the same factors used to determine the reasonableness of salary paid to the owner should be used to determine the reasonableness of salary paid to the related employee

b. That the employee-shareholder never completed high school should be relevant only with respect to the nature and scope of the employee’s work.

c. The fact that the employee-shareholder is a full-time college student might wellcause any salary paid to be deemed excessive

d. If the employee-shareholder was underpaid during the formative period of thecorporation, this is evidence of reasonableness of the compensation if a portionthereof is for service rendered in prior years.

e. If a corporation has substantial E & P and pays only a nominal dividend eachyear, a constructive dividend may be found

f. Year-end bonuses would be vulnerable to constructive dividend treatment, particularly if they are related to profit for the year, are paid only to shareholder-employees, and are determined at year-end on an arbitrary basis.

31.

a. Capon reports the $600,000 dividend as gross income but claims a...
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