Bill Shakespeare started Shakespeare’s Fried Chicken Corp. (a C corp) in 1964 and worked tirelessly to build the business into a nationwide chain of fast-food restaurants. Bill owns 100% of the stock of the corporation and is also the corporation’s CEO—and only real key executive. The corporation has tons of earnings and profits, but has never paid any dividends. The corporation pays Bill a modest salary ($100,000) each year.

Consider the following alternative situations, remembering to explain your answers and cite to the primary authority that supports your answer.

1. 
   A. Under a compensation plan that has been in place since 1968, the corporation pays Bill 20% of the corporation’s net profits as a bonus (on top of his $100,000 salary). In the current year, the corporation had record profits, with Bill receiving a $20,000,000 bonus under the compensation arrangement. As a result, he earned more in the current year than the executives at his larger competitors—like KFC. The company had such a great year because of Bill’s revamping of the company’s hiring practices. Starting in the current year, the corporation began to only hire the smartest, most ambitious job applicants. The results were impressive. Why might the IRS challenge this situation? Will the IRS be successful? Why or why not?
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3. B. Under a compensation plan that has been in place since 1968, the corporation pays Bill 20% of the corporation’s net profits as a bonus (on top of his $100,000 salary). In the current year, the corporation had record profits, with Bill receiving a $20,000,000 bonus under the compensation arrangement. As a result, he earned more in the current year than the executives at his larger competitors—like KFC. While restaurant sales were flat, the company showed a huge profit for the year because it sold forest land behind its headquarters (in Vermont) to the Federation of Quebec Maple Syrup Producers.1 Based on satellite imaging, the Federation had determined that the land behind the company’s headquarters was filled with maple trees capable of producing syrup of sufficient quality to rival Canadian syrup. The Federation was willing to pay well over the fair market value of the land to keep this untapped (pun intended) supply safely off the market (to keep prices high).2 Thus, the company made a huge profit selling the land to the Federation. Why might the IRS challenge this situation? Will the IRS be successful? Why or why not?
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6. C. Under an informal compensation plan, the corporation pays Bill a bonus each year (on top of his $100,000 salary) equal to the projected taxable income of the corporation. (The corporation actually has had a compensation plan in place since 1968, but it ignores it.) As a result, he earned more in the current year than the executives at his larger competitors—like KFC. The corporation had so much taxable income this year because a lot of its assets are near the end of their useful lives and are no longer generating large depreciation deductions. Why might the IRS challenge this situation? Will the IRS be successful? Why or why not?

Answer rating: 100% (QA)

A In this situation the IRS might challenge the payment of the 20000000 bonus to Bill Shakespeare based on the compensation arrangement The IRS could argue that the bonus exceeds reasonable compensati... View the full answer