Ed and his wife Kathie own all of the stock of Crispin, Inc. Kathie is the president and Ed is the vice president. Kathie and Ed are paid salaries of $500,000 and $350,000, respectively, each year. They consider the salaries to be reasonable based on a comparison of salaries paid for comparable positions in comparable companies. They project Crispin's taxable income for next year, before their salaries, to be $975,000. The decide to place their three teenage children on the payroll and to pay them total salaries of $125,000. Each of the children will work about five hours per week for Crispin.
a. What are Ed and Kathie trying to achieve by hiring the children?
b. If the IRS were to audit Crispin do you think they would allow the children's salaries? If not, how would the IRS treat these payments?