Paper , Order, or Assignment Requirements

Brad Pitt and his son, Knox, own all of the outstanding stock of Jolie Corporation. Both Knox and Brad Pitt are officers in the corporation and, together with their uncle, Maddox, comprise the entire board of directors. Jolie uses the cash method of accounting and has a calendar year-end. In late 2009, the board of directors adopted the following legally enforceable resolution (agreed to in writing by each of the officers): Salary payments made to an officer of the corporation that shall be disallowed in whole or in part as a deductible expense for Federal income tax purposes shall be reimbursed by such officer to the corporation to the full extent of the disallowance. It shall be the duty of the board of directors to enforce payment of each such amount. In 2014, Jolie paid Brad Pitt $560,000 in compensation. Knox received $400,000. On an audit in late 2015, the IRS found the compensation of both officers to be excessive. It disallowed deductions for $200,000 of the payments to Brad Pitt and $150,000 of the payment to Knox. The IRS recharacterized the disallowed payments as constructive dividends. Complying with the resolution by the board of directors, both Brad Pitt and Knox repaid the disallowed compensation to Jolie Corporation in early 2016. Knox and Brad Pitt have asked you to determine how their repayments should be treated for tax purposes. Knox is still working as a highly compensated executive for Jolie while Brad Pitt is retired and living off his savings.