Objectives & Outcomes

The objective of this computerized tax simulation is to help you learn how tax planning for revenues and deductions is affected by taxpayers' relative marginal tax rates.
To accomplish this objective, you must
•read the Facts, Issues, & Authorities sections below,
•use the related Excel spreadsheet to analyze the taxpayer's facts, given the tax law, and derive your answer to the issue, and
•submit your conclusions via the web-based input form below and your Excel spreadsheet as an email attachment.

Facts, Issues, & Authorities

Facts  
Justin is a single taxpayer with no dependents, who owns IMC, Inc. (a C corporation). Both entities use the calendar year and cash basis for tax reporting purposes.

Based on year-end tax planning for 2014, the corporation expects to earn taxable income (before paying Justin's salary) of $300,000. The corporation plans to pay 60% of that amount as compensation to Justin, in some combination of salary and dividend. Justin has ordinary taxable income from other sources of $50,000.

Authorities  IRC §1 imposes a tax on an individual's taxable income while IRC §11 imposes a tax on a corporation's taxable income. In addition, §§3101 and 3111 impose taxes under the Federal Insurance Contributions Act on employees and employers, respectively.

For both individuals and corporations, IRC §63 defines taxable income to mean gross income (which generally includes all income from whatever source derived, per §61) minus allowable deductions and excluding items specifically identified in §§101-140. Section 162 authorizes deductions for the ordinary and necessary expenditures incurred in the conduct of a trade or business. More specifically, §162(a)(1) allows a deduction for "reasonable allowance for salaries or other compensation."

Questions
1. Any taxpayers' general tax planning objective is to:
2. Any taxpayers' general strategy for achieving that objective is to:
3. Any taxpayers' income tax planning objective is to:
4. A taxpayer's strategies for achieving that objective  are to:
5. Based on your analysis of the alternatives, which alternative should the taxpayer select?
6. Briefly explain why the taxpayers should select that alternative.
7. Briefly explain which tax planning strategy that alternative relies on.
8. Briefly explain whether the alternative that you selected would change if the provisions under §1(h)(11) expired.
9. Briefly explain why the alternative that you selected would or would not change if §1(h)(11) expired.
10. Assume that the spreadsheet analysis indicated that the taxpayer should take the compensation package as salary. However, you know that the compensation would be unreasonable. Which feasibility constraint is preventing the taxpayers from implementing the conclusion supported by the spreadsheet analysis?