Taxes and Business Decisions 315early successes, through the acquisition of a related business, to intergenera-
tional succession problems.
THE BUSINESS
We first encounter our sample business when it has been turning a reasonable
profit for the past few years under the wise stewardship of its founder and sole
stockholder, Morris. The success of his wholesale horticultural supply business
(Plant Supply Inc.) has been a source of great satisfaction to Morris, as has the
recent entry into the business of his daughter, Lisa. Morris paid Lisa’s business
school tuition, hoping to groom her to take over the family business, and his in-
vestment seems to be paying off as Lisa has become more and more valuable to
her father. Morris (rightly or wrongly) does not feel the same way about his
only other offspring, his son, Victor, the violinist, who appears to have no in-
terest whatsoever in the business except for its potential to subsidize his at-
tempts to break into the concert world.
At this time, Morris was about to score another coup: Plant Supply pur-
chased a plastics molding business so it could fabricate its own trays, pots, and
other planting containers instead of purchasing such items from others. Morris
considered himself fortunate to secure the services of Brad (the plant manager
of the molding company) because neither he nor Lisa knew very much about
the molding business. He was confident that negotiations then under way would
bring Brad aboard with a satisfactory compensation package. Thus, Morris
could afford to turn his attention to the pleasant problem of distributing the
wealth generated by his successful business.
UNREASONABLE COMPENSATION
Most entrepreneurs long for the day when their most pressing problem is figur-
ing out what to do with all the money their business is generating. Yet this very
condition was now occupying Morris’s mind. Brad did not present any problems
in this context. His compensation package would be dealt with through ongoing
negotiations, and, of course, he was not family. But Morris was responsible for
supporting his wife and two children. Despite what Morris perceived as the
unproductive nature of Victor ’s pursuits, Morris was determined to maintain
a standard of living for Victor befitting the son of a captain of industry. Of
course, Lisa was also entitled to an aff luent lifestyle, but surely she was addi-
tionally entitled to extra compensation for her long hours at work.
The simple and natural reaction to this set of circumstances would be to
pay Lisa and Morris a reasonable salary for their work and have the corporation
pay the remaining distributable profit (after retaining whatever was necessary
for operations) to Morris. Morris could then take care of his wife and Victor as
he saw fit. Yet such a natural reaction would ignore serious tax complications.