Tom owns 60 percent of CDF Corporation.CDF rents a building from Tom for $4,500 per month.Fair rental value for the building is only $3,000 per month.In addition, CDF employs Tom's son as the general manager at a salary of $350,000 annually.Similar positions in similar businesses pay $200,000 annually.How much rental and dividend income should Tom report on his tax return for the year?

Question

Quizplus · Accepted Answer

The fair rental value of the building is $3,000 per month, so the excess rent of $1,500 per month ($4,500 - $3,000) is a constructive dividend to Tom. The excess salary of $150,000 ($350,000 - $200,000) is also a constructive dividend to Tom. Therefore, Tom should report $36,000 of rental income ($1,500 x 12 months x 60%) and $168,000 of dividend income ($150,000 x 60%) on his tax return for the year.

Tom Owns 60 Percent of CDF Corporation