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.

---

Definitions:

Learned Helplessness

Belief that one’s actions will not bring about desired outcomes, leading one to give up and quit trying.

Encounter

A meeting or interaction between individuals, which can range from casual or brief to significant.

Failure

Failure is the state or condition of not meeting a desirable or intended objective, often leading to a range of consequences.

Pursuing Goals

The act of setting objectives and making efforts to achieve them.