The revenue agent who audited the Form 1120 filed by LCW Inc.recharacterized $125,000 of the salary paid to Ms.Lewis' (LCW's president and controlling shareholder)as a constructive dividend.LCW's marginal tax rate is 35%,and Ms.Lewis' marginal tax rate is 33%.Which of the following is not a consequence of the recharacterization?
A)LCW's taxable income will increase.
B)Ms.Lewis' taxable income will increase.
C)Ms.Lewis' payroll tax liability will decrease.
D)Ms.Lewis' income tax liability will decrease.

Question

Quizplus · Accepted Answer

Recharacterizing the salary as a dividend does not increase Ms. Lewis' taxable income; it merely changes the nature of the income from salary to dividend.

The Revenue Agent Who Audited the Form 1120 Filed by LCW