How should the repayment by kenny and john be treated

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Reference no: EM132916420

Tax Research

Subject: Repayment agreement between the Merinoffs and Flamingo Corporation

Facts: Kenny and John Merinoff are the sole shareholders of Flamingo Corporation. They are also officers of the corporation and members of the board of directors. In 2008, the Merinoffs entered into a repayment agreement with Flamingo, which stipulated that they would reimburse the corporation for any salary that was subsequently disallowed as a deduction by the IRS. In late 2014, the IRS recharacterized $350,000 of John's 2013 salary and $400,000 of Kenny's 2013 salary as constructive dividends, disallowing Flamingo's compensation deduction for these amounts. Pursuant to the 2008 agreement, Kenny and John repaid the amount disallowed to Flamingo in 2015.

Question 1: How should the repayment by Kenny and John be treated for income tax purposes?

Reference no: EM132916420

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