July 21st 2016
Jack and Jill have a hillside widget manufacturing plant. Widget manufacturing being a highly competitive industry (everyone seems to manufacture widgets) and prone to lawsuits, Jack and Jill incorporate their business on the advice of their attorney. J&J, Inc. elects to be a C corporation, as the two shareholders zero out its income through salaries. Over the years, the competitors of J&J, Inc. begin manufacturing real products, leaving J&J, Inc. the major player in the widget market. J&J, Inc.’s net income quickly rises from $1 million to $100 million.
At that level of earnings the shareholders are no longer able to zero out the corporation’s net income and now find themselves subject to a corporate level tax. What can they do now?View Memo