Question

Whether compensation paid to a corporate employee is reasonable is a question of fact to be determined from the surrounding circumstances. How would the resolution of this problem be affected by each of the following factors?

a. The employee owns no stock but is the mother-in-law of the sole shareholder.

b. The shareholder-employee does not have a college degree.

c. The shareholder-employee works 40 hours per week for another unrelated employer.

d. The shareholder-employee was underpaid for services during the formative period of the corporation.

e. The corporation has never paid a dividend.

f. Year-end bonuses are paid to all employees, but officer-shareholders receive disproportionately larger bonuses

Answer 1

Answer:

A. We should consider the degree of relationship between the mother-in-law of the sole shareholder. If their relationship is important, the salary should be considered as having been paid to the mother-in-law. Therefore, we should consider the degree of their relationship to determine the reasonableness of salary paid to the mother-in-law when we consider the reasonableness of salary paid to the related shareholders.   

B. The employee's qualifications are considered when looking at unreasonable compensation. Although the share holder - employee does not have a college degree, if he can finish his work, his salary is reasonable to his work.

C. The share holders - employee work 40 hours per week for another unrelated employer, that there was not a " clear and mutual understanding " that the fixed weekly salary was intended to compensate the managers for all of their hours worked in a week.

D.   If the employee - shareholder was underpaid during the formative period of the corporation, the compensation is reasonable if compensation is for service rendered in prior years.

E. If a corporation has never pay a dividend, it may be unreasonably.

F.    If the year-end-bonuses are related to the corporation's annual profit, but officer - share holders receive disproportionately larger bonuses is a constructive dividend.