Loretta Is the Sole Shareholder of Country Collectibles,a Calendar Year

question 4

Multiple Choice

Loretta is the sole shareholder of Country Collectibles,a calendar year S corporation.Although Loretta spends at least 40 hours per week supervising Country Collectible's employees,she has never drawn a salary from the business.Country Collectibles has been in existence for five years and has earned a profit every year.Loretta withdraws $100,000 cash from the S corporation each year.Which of the following statements accurately describes the tax consequences of these withdrawals?

• A)The withdrawals are nontaxable,with no risk that they could be recharacterized as taxable salary or dividend payments.
• B)The withdrawals are considered taxable dividends to Loretta.
• C)There is significant risk that the IRS could recharacterize the payments to Loretta as salary.Such treatment would increase taxable income for both Loretta and the S corporation.
• D)There is significant risk that the IRS could recharacterize the payments to Loretta as salary.Such treatment would not change taxable income for Loretta and reduce taxable income of the S corporation.

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Definitions:

Trauma

A deeply distressing or disturbing experience, often resulting in lasting psychological impact.

Mental

Relating to the mind, cognitive processes, or psychological state of an individual.

Emotional State

The internal condition of an individual that involves feelings, moods, and temperaments, influencing perception and behavior.

Compensatory Manner

A way of adjusting behavior or thoughts to make up for losses or deficiencies in other areas.