Patrick Zimbrick and his son, Dan, own all of the outstanding stock of Osprey Corporation. Both Dan and Patrick are officers in the corporation and, together with their uncle, John, comprise the entire board of directors. Osprey uses the cash method of accounting and has a calendar year-end. In late 2006, 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 in each such amount.

In 2007, Osprey paid Patrick $560,000 in compensation. Dan received $400,000. On an audit in late 2010, the IRS found the compensation of both officers to be excessive. It disallowed deductions for $200,000 of the payment to Patrick and $150,000 of the payment to Dan. The IRS recharacterized the disallowed payments as constructive dividends. Complying with the resolution by the board of directors, both Patrick and Dan repaid the disallowed compensation to Osprey Corporation in early 2011.

Dan and Patrick have asked you, their accountant, to determine how their repayments should be treated for tax purposes. Dan is still working as a highly compensated executive for Osprey while Patrick is retired and living off his savings.