Category Archives: Articles

Using 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…
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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;…
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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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Can Reasonable Compensation for a CEO Include Catchup Pay?

By Stephen D. Kirkland, CPA, CMC, CFF Yes, according to some published Tax Court cases, including Choate Construction Company, T.C. Memo. 1997-495. My report and courtroom testimony highlighted the fact that the founder had worked for minimal pay in the first years of the business. In his published opinion, Judge John Colvin (who later became…
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