Mr. Jones is the president of a corporation that is owned by him and members of his family. During a tax year under audit, Mr. Jones was paid a salary of $48,000 by the corporation. The corporation also contributed $12,000 to a pension plan on Mr. Jones's behalf in that year.

Closely held corporations sometimes seek to reduce their corporate tax by treating what are essentially distributions of profits to shareholder-employees as salary compensation rather than dividends because compensation is a deductible expense for the corporation while dividends are not. Dividends are taxable income to the shareholders, but generally at a lower rate than compensation income. The IRS evaluates the reasonability of compensation paid to such shareholder-employees; and, if the amount is deemed unreasonable, the IRS will reclassify the excess amount as a dividend, thereby reducing the corporation's compensation expense and increasing its taxable income.

A dispute has arisen over the compensation paid to Mr. Jones in the tax year under audit. The IRS agent claims that both the salary paid to Mr. Jones and pension plan contribution made by the corporation on his behalf must be taken into account in determining whether the total compensation is reasonable in amount. The agent is about to disallow a portion of the corporation's deduction for the compensation paid to Mr. Jones.

The corporation has asked you to determine whether the pension plan contributions must be taken into account in determining whether the compensation paid to Mr. Jones is reasonable. Give your opinion. In it show authorities, citing laws, regulations, interpretations and decisions applicable to the issue of whether the pension plan contributions made by the corporation must be included as part of Mr. Jones's compensation in determining whether his compensation is reasonable.

References

https://thismatter.com/money/tax/

https://www.irs.gov/