Tax News

CCH (cch.taxgroup.com) reports:

  The Tax Court committed clear error when it determined that the compensation paid by a corporation to its Chief Executive Officer, who was also its controlling shareholder, was excessive, and that the compensation was a disguised dividend. The Tax Court acknowledged that the CEO's compensation was presumed reasonable, but ruled that the presumption was rebutted because the CEO's compensation greatly exceeded the compensation of the CEOs of other corporations involved in the same business. However, the Tax Court failed to consider the severance packages, retirement plans or perks of the other executives, especially where such considerations made an enormous difference to an executive's compensation. Undisputed evidence was presented that the CEO in this case did work that was delegated to staff in the other companies. He micromanaged his business, his board of directors was dependent on him and the amount of work he did was normally devolved upon two or more directors in publicly held companies.

  Further, the Tax Court incorrectly regarded the CEO's compensation as a disguised dividend. The payment of a year-end bonus was not indicative of a "concealed" dividend because it was paid before the determination of the corporation's net income for the year, it was paid annually, not quarterly, and it was a percentage of net income, rather than a set dollar amount. Since there was an almost complete fusion of management and ownership in the corporation, the fact that no formal dividend was paid to the CEO could not result in treating any portion of the compensation as dividend. Finally, the Tax Court's opinion that a one-man corporation could not pay its CEO any salary and that owners did not need or deserve salaries because they would receive the profits of the business was rejected. For compensation purposes, a shareholder-employee should be treated like any other employee.

  Reversing the Tax Court, 88 TCM 229, Dec. 55,746(M), TC Memo. 2004-207. Related decisions at 89 TCM 656, Dec. 55,904(M), TC Memo. 2005-3 and 130 TC 54, Dec. 57,336.

Menard, Inc., CA-7, 2009-1 USTC ¶50,270

Other References:

 
Code Sec. 162

  CCH Reference - 2009FED ¶8520.1426

  CCH Reference - 2009FED ¶8520.1925

  CCH Reference - 2009FED ¶8637.021

  CCH Reference - 2009FED ¶8637.57

  CCH Reference - 2009FED ¶8637.701

  CCH Reference - 2009FED ¶8640.12

  CCH Reference - 2009FED ¶8851.182

 
Code Sec. 6662

  CCH Reference - 2009FED ¶39,651G.115

  CCH Reference - 2009FED ¶39,651G.155

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 3,106