Question

The IRS agent who audited the Form 1120 filed by Alano Inc. concluded that $300,000 of the salary that Alano paid to its CEO and sole shareholder was a constructive dividend. As a result: Multiple Choice The CEO/shareholder's taxable income increases by $300,000. Alano must distribute an additional $300,000 cash to the CEO/shareholder Alano must distribute an additional $300,000 cash to the CEO/shareholder. Alano's taxable income increases by $300,000.

Answer 1

Answer: Alano's taxable income increases by $300,000.

Explanation:

Constructive dividends are paid to a shareholder and classified in such a way that they are not to be seen as taxable dividends.

If during auditing however, the IRS determines that it was indeed a taxable dividend, it becomes a constructive dividend.

Constructive dividends are taxable by definition so Alano's taxable income increases by the amount of dividend of $300,000.