Summary: Case Study
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 …show more content…
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 dividends received deduction under § 243 of $420,000 (70% × $600,000). None of the other items affect taxable income. Thus, taxable income is $1,380,000 ($1,200,000 taxable income
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 …show more content…
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 dividends received deduction under § 243 of $420,000 (70% × $600,000). None of the other items affect taxable income. Thus, taxable income is $1,380,000 ($1,200,000 taxable income