I:4-63 Jay Corporation owns several automobile dealerships. This year, the corporation initiated a policy of giving the top salesperson at each dealership a free vacation trip to Florida.

The president believes that this is an effective sales incentive. The cost of the vacations is deductible by the corporation as compensation paid to employees, and is taxable to the recipients. Nevertheless, the president objects to reporting the value of the vacations as income on the W-2s of the recipients and to withholding taxes from wages for the value of the trips. He feels that this undermines the effectiveness of the incentive. What are the implications of this behavior for the corporation and the president?

TAX RESEARCH PROBLEMS