Sunset Scavenger Company Case Summary

TO: Mr. Kim
FROM:
DATE: October 10th 2010
RE: Tax Memo #2-Executive Compensation
Issue One and Applicable Case Law, Code & Regulations
As one of our esteemed client, we are glad to assist you and we would like to give you some information concerning the current situation at your company. It has come to our attentions that you requested to obtain information about the CEO’s salary that may be termed as approriate if the IRS audits it.
The case of Elliott v Commissioners 716 F.2d 1241, 1983 US is the best one to decide on whether the IRS auditing will reveal that Mr. Kim’s compensation is unreasonable. The court brought out some five factors, to look at in determining whether compensation is reasonable. The first one is that compensation…show more content…
Commissioner 84 F.2d, 453/455 1936 can be used in the analysis of Mr. Kim’s salary using the independent investor approach on equity. Unlike in the previous approach where it was proved that Kim’s salary is reasonable owing to the five factors enumerated in the Elliott case; this approach considers this salary unreasonable. According to the approach, the salary that the CEO gets is very high because it covers over 80% of the total profit the company makes. This is because; if the CEO gets all this money, there will be a serious effect on the returns on equity of the arm’s length investor. 26 U.S.C. 162(a) (1) requires that the highest amount of compensation set on executives should not have a serious effect on the investor’s return on equity. The article requires the deductions of all the expenses, which includes among others include ordinary and necessary expenses and…show more content…
(1983). Elliotts Inc. v. Commissioner. Retrieved October 9, 2010, from www.bvresources.com/BVWireCentral/Material/BVWire52-4/Elliots.pdf+ELLIOTTS+CASE&hl=en&gl=ke&pid=bl&srcid=ADGEESgBbJ3e8oifazpEIV7y7dOZwZ-YxLwZ6wO6svMZKPubg3_-Jh-b8boKReI1BeB-WnWcTglvTOvNdyKCfC9YOPchp2Y
IRC Section 4958. (2010). Retrieved October 10, 2010, from http://www.sharinglaw.net/npo/section_4958.htm
IRS Press. (2006). Your Federal Income Tax. IRS Publication.
Menard Inc v. Commissioner of Internal Revenue, No. 08-2125 (United States Court of Appeals March 10, 2009 ).
Section 501. (2010). Retrieved October 10, 2010, from http://www.labyrinthinc.com/sharedcontent/sec501.asp?Page=5&subs=6
Siegel, B. (2004, California CPA ). Tax benefits of IRC Sec. 165. California CPA .
Square D Company v. Commissioner of Internal Revenue, No. 11 (121 T.C. September 26, 2003).
Sunset Scavenger Company v. Commissioner 84, No. 7999 (Circuit Court of Appeals, Ninth Circuit June 8, 1936).

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[ 1 ]. [ (bvresources.com, 1983) ]
[ 2 ]. [ (Mark, A. et al, 1987) ]
[ 3 ]. [ (Jones, S. & Shelley, R., 2009) ]
[ 4 ]. [ (Sunset Scavenger Company v. Commissioner 84, 1936) ]
[ 5 ]. [ (Section 501, 2010) ]
[ 6 ]. [ (IRC Section 4958, 2010) ]
[ 7 ]. [ (Brennan, 1994) ]
[ 8 ]. [ (bvresources.com, 1983) ]
[ 9 ]. [ (IRS Press, 2006)