Question

Sean Moon is president, secretary, treasurer, sole director, and sole shareholder of Streetz, an S corporation real estate company. He manages all aspects of the company’s operations, and he is the only person working at the com- pany that holds a real estate broker’s license. Sean works 12-hour days and takes few days off. Streetz’s gross receipts and net income figures were reported as follows.

Year   Gross Receipts Net Income

2015   $376,453   $122,605

2016 405,244   161,660

2017   518,189 231,454  

Sean and his wife, Kim, filed joint Federal income tax returns, but they did not report any wages or salaries on line 7 of their returns. During 2017, Moon transferred $240,000 from the S corporation to his personal account. You are an expert witness for the IRS. Identify the items you would present to the U.S. Tax Court with respect to the amount of Moon’s compensation that is subject to employment taxes and any other taxes due for the year 2017 (especially the Medicare net investment income tax). Hint: This is a reasonable compensation issue.

Answer 1

First of all this is a question related to taxation of US, not an accounting one.

In the given case, Sean Moon is president, secretary, treasurer, sole director, and sole shareholder of the company. Also he is the only person working in the company.

Since Moon has transferred 240000 from S Corporation to personal account and the Net Income of the S Corporation for 2017 is 231454, it will be assumed the 240000 is transferred to Draw Account. Whereas the Income chargeable to taxes would be 231454 only.