Simon and Sherry divorce during the current year. As part of their property settlement, Simon gives Sherry 25% of the stock in his 100%-owned corporation, Hobday, Inc. The stock has a fair market value of $80,000. Rather than pay Sherry any alimony, Simon agrees to make her a vice president of Hobday with an annual salary of $70,000. In her position, Sherry has no responsibilities or involvement with the company.

Identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify.