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Elmore_Tax Memorandum_2 - MEM O To From Date Re Message Mr...

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MEM O To: Mr. Kim From: Nikeya Elmore Date: 12/12/2010 Re: Your call from 12/12/06 Message: Tax Memo #2/ Executive Compensation FACT: Assuming that 2007 is a typical year for KimTech, in terms of profitability and compensation practices, evaluate the reasonableness of Kim’s compensation package in light of the five factors enumerated in the Elliotts case. If audited by the IRS, will Kim’s compensation be deemed reasonable? Why or why not? What can KimTech do to show that Kim’s compensation is reasonable? APPLICABLE CASE LAW, CODE & REGULATIONS: The relevant case law is Elliotts, Inc. v. Commissioner (1983) that is used to ascertain reasonable compensation under section 162(a)(1). The five factors are employee's role in the company, external comparisons, character and condition of the company, conflict of interest, and internal consistency. CONCLUSION: Mr. Kim’s compensation will be deemed reasonable by the IRS. The bonus is over 80% of the total earning of the company. Also Mr. Kim has a fixed salary of $100,000 and his compensation is 90% of net pretax compensation. The seems like an attempt to
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avoid paying taxes, however Mr. Kim can state that he falls under the five factors
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