Matt, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year. The Tax Court has held that $200,000 represents unreasonable compensation. Matt must report a salary of $400,000 and a dividend of $200,000 on his individual tax return. True / False.

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Business

Esmeralda Mcdonald

25 February, 07:21

Matt, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year. The Tax Court has held that $200,000 represents unreasonable compensation. Matt must report a salary of $400,000 and a dividend of $200,000 on his individual tax return. True / False.

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Josephine Kim · Answer 1

True

When the payment of salary is not considered reasonable, the excess will be treated as dividend. Hence, Matt is a sole shareholder and is taxable for the dividends as well as salary.