Nittany company pays its sole shareholder, Tami lion, a salary of $90,600. At th

Question

Nittany company pays its sole shareholder, Tami lion, a salary of $90,600. At the end of each year, the company pays Tammi a bonus equal to the difference between the corporations taxable income for the year and $67,500. In this way the company hope to keep it taxable income and amounts that are tax that either 15% or 25%. This year, Nittany reported pre-bonus taxable income of $675,500 and pay Tammy a bonus of $608,000. On audit, the IRS determine that individuals working in Tammi‘s position earn on average $304,000 per year. The company had no formal compensation policy and never paid a dividend.
1). How much of Tammi‘s bonus might the IRS recharacterize as a dividend.?
2) Assuming the IRS re-characterizes $197,300 of Tammy’s bonus as a dividend, what additional income tax liability does Nittany company face?

Nittany company pays its sole shareholder, Tami lion, a salary of $90,600. At the end of each year, the company pays Tammi a bonus equal to the difference between the corporations taxable income for the year and $67,500. In this way the company hope to keep it taxable income and amounts that are tax that either 15% or 25%. This year, Nittany reported pre-bonus taxable income of $675,500 and pay Tammy a bonus of $608,000. On audit, the IRS determine that individuals working in Tammi‘s position earn on average $304,000 per year. The company had no formal compensation policy and never paid a dividend.
1). How much of Tammi‘s bonus might the IRS recharacterize as a dividend.?
2) Assuming the IRS re-characterizes $197,300 of Tammy’s bonus as a dividend, what additional income tax liability does Nittany company face?


1). How much of Tammi‘s bonus might the IRS recharacterize as a dividend.?
2) Assuming the IRS re-characterizes $197,300 of Tammy’s bonus as a dividend, what additional income tax liability does Nittany company face?

Explanation / Answer

Ans 1 Tammy received constructive dividend to the extent the bonus is considered as compensation which is unreasonable in nature. The compensation in excess received by Tammy i.e More than what he would received in his position, is treated as dividend Excess compensation recharacterize as dividednd(90600+608000-304000) 394600 ans Ans 2 He would be denied deduction of $197300 thus increasing his taxable income (197300+90600) 287900 Of total 197300 25000*34% 8500 (197300-25000)*39% 67197 Additional tax 75697

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