Z is a ten-percent (10%) shareholder of H, Inc.H, Inc.has distributable net income of $100,000 this year and no accumulated earnings and profits.Z was paid $15,000 by the company for his expertise as a pilot, but he did not fly this year.How is the IRS likely to view the $15,000?

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Quizplus · Accepted Answer

The IRS is likely to view the $15,000 as a $10,000 dividend and a $5,000 salary or return of capital. This is because H, Inc. has no accumulated earnings and profits, so any distribution to shareholders is considered a dividend up to the amount of the company's distributable net income. The remaining $5,000 could be considered a salary or return of capital, depending on the facts and circumstances.

Z Is a Ten-Percent (10%) Shareholder of H, Inc