Chapter 5 Research Problem 1 TAX FILE MEMORANDUM January 31, 2011 FROM: Anita Man SUBJECT: Osprey Corporation Today I talked to Patrick Zimbrick of Osprey Corporation with respect to the January 30, 2011 letter. In 2009, Osprey paid Patrick $560,000 and Dan received $400,000. On an audit in late 2010, the IRS found the compensation of both officers to be excessive. It disallowed deductions for $200,000 of the payment to Patrick and $150,000 of the payment to Dan. At issue: Dan and Patrick have asked to determine how their repayments should be treated for tax purposes. Conclusion: The first thing I notice in this problem is that the IRS found the compensation of both officers to be excessive. A salary payment to a shareholder-employee that is deemed to be unreasonable compensation is frequently treated as a constructive dividend. As a consequence, it is not deductible by the corporation. In addition, Patrick and Dan run the risk of a finding of unreasonable compensation, based on the following factors:
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Salary, Taxation in the United States, Closely Held Corporation, Osprey Corporation, unreasonable compensation