Laura, the Controlling Shareholder and an Employee of Southtown Corporation

question 2111

Multiple Choice

Laura, the controlling shareholder and an employee of Southtown Corporation, receives an annual salary of $750,000. Based on several factors including the size of the corporation's operations and a comparison of salary received by officers of comparably sized corporations, the IRS contends that Laura's salary should be no higher than $600,000. The Court upheld the IRS's position. As a result, which of the following is true?

• A) $750,000 is deductible by the corporation; $600,000 is taxable to Laura.
• B) $750,000 is deductible by the corporation; $750,000 is taxable to Laura.
• C) $600,000 is deductible by the corporation; $750,000 is taxable to Laura.
• D) $600,000 is deductible by the corporation; $600,000 is taxable to Laura.

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Definitions:

Wealth Effect

The change in spending that accompanies a change in perceived wealth, typically when home values or investment portfolios increase.

Induced Consumption

Describes consumer spending that increases when income increases and decreases when income decreases, directly related to the level of disposable income.

Average Propensity

The proportion of total income or revenue that is spent on a certain category of expenditures or savings.

Save

The process of setting aside a portion of current income for future use or investment.