Corporate Tax Act Essay

The resolution stipulated that any overpayment of net profit disallowed as a logical 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 inferential dividends. This was done beca mapping the salaries were found to be excessive. Reg 1. 162-8 states excessive compensation allow for be disallowed to the corporation and treated as a constructive dividend to the shareholder.Because the contract 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 set up some tax objective not available through the use of direct dividends. Alternatively the shareholders may be seeking benefits for themselves while avoiding the credit entry of income(2012, 5-16).Because the resolution did contain a repayment provision it should reduce the resolution 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 pass on. The IRS will recharacterize an item that has been deducted on the unified 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 endpoints in the IRS defence 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 termination that it is reasonable and is in fact payment purely for services. In a crusade si milar to Dan and Patricks situation involving excessive compensation, Vincent E. Oswald v. Commissioner, 49 T. C. 645 (1968), the hail found the repayments to be a deductible set down.In this case the scruple was whether, under section 162 of the Code, the officers are entitled 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 instalment 1. 162-1 of the Income Tax Regulations provides, in part, that ordinary and necessary expenditures directly connected with or pertaining to the taxpayers trade or business are deductible from rough 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 stir 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 requirement that a taxpayer be entitled to this deduction has both subsets. One, there must be a deduction as the result of the restoration of income, and two, the deduction must occur under a decree section other than section 1341. In a federal case Van Cleave v.