Question

Thomas, the sole shareholder of Crayon Corporation (a C corporation), has the corporation pay him a salary of $500,000 in the current year. The Tax Court has held that $150,000 represents unreasonable compensation. Don must report a salary of $350,000 and a dividend of $150,000 on his individual tax return.

True

False

Answer 1

True

Because Crayon corporation is a C corporation, it faces double taxation, Crayon corporation reports it's income and expenses and computes taxes on its taxable income. It gets a deduction for Thomas's salary that considered reasonable. However, it cannot deduct for unreasonable compensation. Thomas is an employee and shareholder thus receiving both salary and Dividends from th corporation. Thomas must report the dividends he receives on his personal income taxes. Thomas salary is deductable, however the dividends he receive are not deductable by the corporation. The corporation taxable income will increase by the$150,000 unreasonable compensation that was paid to Thomas.

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