Portfolio Project Description *NOTE THAT I AM AWAITING THE ACCESS CODE TO THE WEBSITE STATED BELOW TO CITE A CASE LAW FOR EACH PROBLEM AND WILL SUBMIT IT ONCE ITS RECEIVED. IT DOESN’T APPEAR TO BE A...

Answer to question 1
Taxability of Salary for Employee-shareholder-
Shareholder employee is entitled to two types Income from corporation-
(i) Salary/Wages
(ii) Dividend
Salary/wages are subject to FICA payroll taxes, in which 7.65% will be paid by concern and
7.65% will be paid by employee. Payment of salary is allowed as deductable expense to the
concern.
Taxability of Salary for Employee-shareholder-
Dividend means distribution of corporate profits to the shareholders of concerns. This
distribution will be taxed at corporate rate and liable to be paid by the concern, so it is called
“Qualified Dividend”. This Qualified Dividend will be taxed at “preferential rate” for
individual shareholders.
Individual shareholder will be eligible for Tax credit equal to the taxes paid on dividend by
the corporation. This will avoid the double taxation.
Case History-
In the given case Patrick Zim
ick and his son are the only shareholders of “Osprey
Corporation” and also the “Officers” of corporation including their Uncle John. Three of
them form the entire “Board of Directors”.
In 2006, a resolution has been passed by the company, stating that any salary payment
disallowed under “federal tax” shall be reimbursed by the “officers” to the concern.
In 2007, concern paid the following salaries-
(i) Patrick- $560000
(ii) Dan-$400000
In 2010, IRS disallowed the following amounts and recharaterised as “constructive
dividends”-
(i) Patrick- $200000
(ii) Dan-$150000
Meaning of Constructive dividend-
www.fogelcpa.com/Documents/ConstructiveDividend.pdf
MENARD, INC. v. COMM., Cite as 103 AFTR 2d 2009-1280 (560 F.3d
620), 03/10/2009 , Code Sec(s) 162; 61; 301
Constructive dividend implies the amount paid by any concern to the shareholder other than
in form of dividend declared. Constructive dividend arises in following situation-
(i) Any amount paid by concern which do not qualify for corporate deduction
(ii) Due to this shareholder receive any amount of gain or economic benefit.
Tax Treatment of “Constructive Dividend” in case of repayment-
Following provision of IRS will be applicable in case of Repayment of amount treated as
“Constructive dividend”-
1. IRS must have disallowed the compensation paid to shareholder-employee.
http:
www.fogelcpa.com/Documents/ConstructiveDividend.pdf
2. Bylaws of concern must contain the provision regarding repayment of disallowed
compensation by shareholder.
3. Shareholder must repay the amount.
If all the 3 conditions are fulfilled by concern and the shareholder then shareholder will
e entitled to “deduct the repayment made to concern”. Shareholder will need to
eclassify the excess compensation repaid in his “individual return”.
In case of company, constructive dividend will be disallowed and will be liable to tax as a
egular dividend.
Tax treatment in Case Law-
taxation.lawyers.com
In the given case, treatment of “Constructive dividend will be as follows-
(i) For shareholder- As condition of repayment is fully satisfied under the given case
law, so the amount of constructive dividend repaid by shareholder will be allowed
to be deducted and shareholder will have to reclassify and adjust the amount in
their individual returns.
(ii) For Company- In case of concern, Constructive dividends will be disallowed and
liable to normal dividend tax. This will increase the income of concern as well as
its tax liability.
Conclusion-
As per our research regarding taxability of salary and dividend in case of employee
shareholder, following conclusion can be drawn-
http:
taxes.about.com/od/scorporations/qt/scorp_payroll.htm
http:
taxes.about.com/od/scorporations/qt/scorp_payroll.htm
1. When shareholders are employee of concern then they receive two types of Income
from concern i.e. Salary and Dividend.
2. Qualified dividends are liable to be taxed at corporate rate for concern and taxable at
preferential rate i.e. at lower rate for individual shareholders in order to avoid double
taxation.
3. Salary...