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  • Reasonable Compensation Job Aid for IRS Valuation Professionals
    Reasonable Compensation   Job Aid for IRS Valuation Professionals*   *(This Job Aid Can Also be Helpful to Revenue Agents and Other IRS Field Personnel) October 29, 2014 Developed by a Team of IRS Valuation Professionals From the Large Business and International Division This Job Aid is current as of the original date of issuance only. This Job Aid is not Official IRS position and was prepared for reference purposes only; it may not be used or cited as authority for setting any legal position.   Disclaimer This Job Aid is not an official pronouncement of law, and cannot be used, cited, or relied upon as such. This Job Aid is a guide for IRS Valuation Professionals on the Reasonable Compensation issue in Not-for-Profit and For-Profit entities. The Reasonable Compensation issue is factually intensive and must be determined based on all relevant facts and circumstances. The IRS Valuation Professional must first develop all relevant facts and then use professional judgment in choosing appropriate comparables and computing reasonable compensation using applicable valuation approaches. Although the specific…
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  • REASONABLE COMPENSATION JOB AID APPENDICES
    REASONABLE COMPENSATION JOB AID 10/29/2014 APPENDICES APPENDIX A: SUGGESTED READINGS ON REASONABLE COMPENSATION APPENDIX B: DATA SOURCES FOR COMPENSATION ISSUES APPENDIX C: INFORMATION DOCUMENT REQUEST SUGGESTIONS APPENDIX D: FINANCIAL ANALYSIS - EXAMPLE APPENDIX E: MARKET APPROACH - EXAMPLE APPENDIX F: INCOME APPROACH - EXAMPLE APPENDIX G: COURT CASES RELATING TO PRIOR YEARS’ UNDERCOMPENSATION APPENDIX H: COURT CASES RELATING TO MULTIPLE JOBS ("Many Hats") APPENDIX I: EXAMPLE OF NOT-FOR-PROFIT ANALYSIS (UNIVERSITY SECTOR)   APPENDIX A: SUGGESTED READINGS ON REASONABLE COMPENSATION  Publications: Reasonable Compensation: Application and Analysis for Appraisal, Tax and Management Purposes, Ron Seigneur & Kevin Yeanoplos, Business Valuation Resources, LLC, Portland, OR (2010) Valuing a Business, Shannon Pratt, Irwin Press, 5th Edition (2010) Financial Valuation: Applications and Models, James Hitchner, John Wiley & Co. (2006) Reasonable Compensation, BNA portfolio 390, 5th Ed, Tax Management (2011) Reasonable Compensation: Do You Know Where Your Circuit Stands?, Melanie McCoskey, 109 Journal of Taxation, (October 2008) Court Decisions Focusing on Methodologies * Mayson Mfg. Co. v. Commissioner, 178 F.2d 115 (6th Cir. 1949) * Elliotts, Inc. v. Commissioner, 716…
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  • Shareholder Disputes at Closely-Held Businesses
    Over the last twenty years, an increasing number of attorneys have contacted me about litigation among shareholders of closely-held businesses. Shareholders of closely-held businesses in various parts of the United States are embroiled in litigation with each other over the amount of compensation that one or more of the shareholder-officers received. These lawsuits seem to be increasingly common at professional service firms, including law firms, medical practices and CPA firms. These disputes have also become common in both old economy and new economy businesses.  The older businesses may have been passed along to the second or third generations of the founders’ families. The new economy companies involve e-commerce or intellectual property that has become valuable and the creators feel that they deserve compensation for work they did in the development stages. In many of these cases, some of the shareholders may not have been aware of the compensation terms between their companies and the officers. Perhaps those terms were unwritten or the officers were able to set their own bonus amounts.  Once other shareholders find…
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  • Helping S Corporations avoid Unreasonable Compensation Audits
    © 2015 American Institute of CPAs - All Rights Reserved.  Reprinted with permission from the June 2015 issue of Journal of Accountancy. Find out what entries on Form 1120S may trigger these audits. By Stephen D. Kirkland, CPA, CMC, CFC, CFF Since compensation is subject to employment taxes (including Federal Insurance Contributions Act taxes) and distributions to shareholders are not, S corporation owners often reduce their compensation and increase their distributions. Therefore, one of the IRS's hottest audit triggers for S corporations is insufficient compensation paid to shareholders. By understanding how the IRS evaluates data on Form 1120S, U.S. Income Tax Return for an S Corporation, and preparing accurate tax returns, CPAs can help these companies reduce their chances of being audited. IRS audits of S corporation income tax returns can result in an increase in the payroll taxes the corporation owes, as well as interest and penalties. In response, owners want CPAs to carefully avoid the red flags that trigger these audits. Use these nine steps to help S corporations reduce the likelihood of…
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