Randall & Wanda decide to start their own tax law practice. On March 1, 2014, they establish R&W LLC, and file elections to treat it first as a corporation, and then as an S corporation for tax purposes. Randall and Wanda each contribute $100 to R&W, and each receives a 50% membership interest in the entity. Randall and Wanda also become employees of R&W LLC, paying themselves a $20,000 salary each for 1,500 hours of work (by each) during 2014. R&W LLC earns $200,000 from clients and has $60,000 of other deductible expenses (such as rent), in addition to the $40,000 in salaries paid to Randall & Wanda, for 2014. Randall and Wanda each take a $50,000 distribution from R&W LLC during 2014, in addition to their $20,000 salaries.

1. Describe the tax treatment of these transactions if the form of these transactions is respected for tax purposes.
2. In what manner is the IRS likely to re-characterize these transactions? What would be the tax consequences of such recharacterization?
3. What is the taxable year of R&W LLC?