Tax Memo: Pension Payments Mr. Jones From, Case Study

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Tax Memo: Pension Payments

Mr. Jones

From, Tax Accountant, CPA

You are the president of a corporation owned by yourself and other family members. Your salary from this corporation during the year in question was $48,000. During this same year, $12,000 was also contributed by the corporation to a pension plan held on your behalf. You believe that this contribution should not be considered a part of your taxable income for the year in question. The IRS agent conducting an audit of the year in question believes the pension plan amount should be considered when making a determination of reasonable compensation.

The issues in this case are (1) whether it is proper to include the pension plan in a determination of compensation, and (2) if such inclusion would affect the determination of the compensation amount of any tax liabilities for the corporation or Mr. Jones during the year in question.

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Rule

Allowance for retirement benefits, received or not received, has been made by the tax court in previous cases where disputes of reasonable compensation have arisen (Brewer Quality Homes, Inc. v. Commissioner of Internal Revenue, 2003). This would suggest that pension contributions by the employer are part of a reasonable compensation determination. While the Tax Court allowed only a 5% allowance for retirement benefits in addition to actual income in this case, the total compensation level at issue was higher by more than….....

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