Compensation Paid to a Shareholder and Subsequently Recharacterized by the IRS

question 50

True/False

Compensation paid to a shareholder and subsequently recharacterized by the IRS as a dividend because it was considered "unreasonable" will affect only the income tax liability of the corporation paying the compensation and the receiving shareholder.

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Definitions:

Inelastic

Describes a situation where the demand or supply for a good or service is not significantly altered when the price changes.

Elastic

A characteristic of a product or service indicating that a change in price leads to a significant change in the quantity demanded or supplied.

Laffer Curve

An illustration of the relationship between tax rates and tax revenue, suggesting that there is an optimal tax rate that maximizes revenue.

Tax Rate Reductions

A decrease in the percentage at which income or transactions are taxed by governmental authorities.