Guzman Corporation Has Its Expenditure of $700,000 for Salary to Its

question 86

Multiple Choice

Guzman Corporation has its expenditure of $700,000 for salary to its president and sole shareholder disallowed as a deduction by the IRS. Comparable salaries for presidents of similarly sized firms in the same industry average $300,000. The IRS reclassified $400,000 as a nondeductible cash dividend. Which of the following form the basis for the IRS disallowance?
I.Lack of Business Purpose.
II.Administrative Convenience Concept.
III.Capital Recovery Concept.
IV.Substance over Form Doctrine.
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• A)Only statement I is correct.
• B)Only statement IV is correct.
• C)Statements I and IV are correct.
• D)Statements I, II, and IV are correct.
• E)Statements I, II, III, and IV are correct.

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Definitions:

Investment

The allocation of resources, typically money, in the expectation of generating an income or profit.

Commercial Banking

A banking sector that provides services to individuals and businesses, including loans, deposits, and payment services.

Toxic Mortgage Securities

Financial instruments derived from bundles of mortgages that are at high risk of default, contributing to financial crises when their value collapses.

$700 Billion Bailout

Refers to the Emergency Economic Stabilization Act of 2008, a U.S. government program to purchase distressed assets from financial institutions to stabilize the economy.