The reference in Internal Revenue Code § 162(a)(1) to “other compensation” includes all current and deferred compensation. Deferred compensation includes employer contributions to qualified retirement plans and non-qualified deferred compensation arrangements. The current value of any equity-based compensation, such as stock options, is also considered. The costs of welfare benefits and fringe benefits are also…
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The Multi-Factor Approach
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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