In an important recent case on reasonable compensation, H.W. Johnson, Inc., T.C Memo 2016-95 (Tax Ct.), the Tax Court found for the Taxpayer.
The Taxpayer, a concrete contracting business, was owned 51% by the founder’s wife and 49% by her two sons. On its tax return, the taxpayer deducted approximately $4 million and $7.3 million in compensation to the sons in 2003 and 2004, respectively.
On audit, the IRS denied a portion of the deduction as unreasonable. The Tax Court disagreed, finding that the sons were integral to the successful performance of the company and that an independent investor would have been satisfied with the return on equity. Therefore, the amounts paid to the sons were found reasonable.
As is always the case in such circumstances, review of the case can provide valuable insight as to best practices in dealing with similar matters.
An extended discussion of the details in the case is available on https://gyf.com/case-challenges-reasonable-compensation/
Should you have questions or comments, please contact Bob Grossman at 412-338-9300.