Beau Jackson has a successful manufacturing business. The business is an S corporation. This is the capital intensive business; it has a great deal of assets and is not particularly labor intensive. Jackson's job as the president is simply to manage the employees in the business, and also the office staff including salespeople. For the next three years, anticipated sales and expenses are as follows:

Year 1 Year 2 Year 3

Sales $1,000,000 $1,200,000 $1,500,000

Direct Costs 500,000 500,000 600,000

Operating Expenses 400,000 550,000 750,000

Operating expenses include all payroll costs for all employees of the company, and also all payroll taxes, excluding however any compensation of Jackson himself. Jackson does not anticipate needing to reinvest any profits back into the business over the next three years. Instead, he will take out all of the excess of sales over expenses, for himself.

1. Show the result for each year if Jackson takes out all that profits as compensation, assuming a 30% income tax rate, and also Social Security/FICA taxes as calculated under the current rules. For the Social Security taxes and other payroll taxes and costs, show the total paid for both Jackson and his corporation.
2. Show the result each year if Jackson takes out all profits as a distribution, again showing both income taxes and any total self-employment or FICA taxes.
3. So the result each year of Jackson goes 50-50, taking all net profits out for each year half as compensation in half as a profit share.
4. Using case law discussed in the reading materials, and in your tax research, explain how low you would go in setting compensation at the lowest level you still felt would pass scrutiny if it were challenged by the IRS. Support your answer! Refer to articles, case law, or other authority to explain how you arrived at your recommended number.