Beginning with Mayson Manufacturing Co. v. Commissioner, 178 F.2d 115 (6th Cir. 1949), the courts have developed various factors to consider in determining whether compensation amounts were reasonable. Some of the key factors are: · The employee’s qualifications, including education and training, · The nature, extent and scope of the employee’s duties, · The amount…
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Using Compensation Comparability Data
We often need to determine reasonable compensation amounts for executives, attorneys, charity managers, trustees, or retirement plan service providers. This is an important process and should not be taken lightly. At first blush, it is tempting to assume that the market establishes reasonableness. Hence, we often use benchmarking, which involves comparing one person’s pay level to…
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The Hypothetical Independent Investor Test
In determining reasonable compensation, the courts (and the IRS) have looked to a number of factors and have used various approaches over the years. Typically, the approach has been to apply from 5 to 12 (or more) factors to determine whether compensation amounts were reasonable. In recent years, the courts continue to use these factors; however,…
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Can Shareholders Determine Reasonable Compensation for a CEO?
Yes, according to at least one opinion published by the United States Tax Court. In Allen L. Davis, et al v. Commissioner of Internal Revenue, T.C. Memo 2011-286, the Tax Court considered an unusual set of facts. Allen Davis and his two adult sons were shareholders of an extremely profitable S corporation. When Mr. Davis exercised…
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