On March 2, 2022, the Tax Court issued a Memorandum Opinion in the case of Clary Hood Inc. v. Commissioner (T.C. Memo. 2022-15). The primary issue presented in Clary Hood Inc. was the amount the petitioner may deduct under IRC § 162(a)(1) as reasonable compensation paid to its chief executive officer (CEO) and shareholder Clary L. Hood (Mr. Hood) during the years at issue.

Background to Clary Hood Inc. v. Commissioner

According to Judge Greaves

To understand Clary Hood, Inc., one must first know Mr. Hood.

Mr. Hood learned construction, land grading, excavation, and even how to repair the machinery from an early age from his father. By 1980, Mr. Hood decided to create his own path (which he was good at, because, you know, the whole construction and land grading skillset). The petitioner, Clary Hood Inc., started with only two employees and a hodgepodge of used equipment valued at no more than $60,000 before growing into a 150-person company with nearly $70 million in revenue by the end of its 2016 tax year.

Success was not immediate or easy as the petitioner faced external pressures and undertook significant risks along the way. Nonetheless, successful it was towards the end. Even after its tremendous financial success, the petitioner never declared or paid a cash dividend to its shareholders, i.e., Mr. and Mrs. Hood, at any time during the review period.

While Mr. Hood’s leadership and work ethic contributed to petitioner’s exponential growth, petitioner’s success would have been fleeting if not for the hard work and dedication of petitioner’s other executives: Andy Painter, Tom Addley, Chris Phillips, Mrs. Hood, and Wesley Hood (Wesley), Mr. Hood’s son. Wesley was the heir apparent, having been named president in 2001 and CEO in 2006. By 2011, Wesley had enough, and left the petitioner.

Painter replaced Wesley as president in 2012. Adley served in an executive capacity as an onsite project manager. Phillips was a CPA who joined the petitioner in 2010, becoming CFO in 2011, and working full time beginning in 2016. Mrs. Hood acted as a general adviser to petitioner on equipment needs, project needs, personnel needs, and financial management. She was also responsible for personal guaranties to bonding companies on behalf of petitioner during the review period.

Compensation of Mr. Hood

The board of directors in Clary Hood Inc. v. Commissioner set Mr. Hood’s compensation. This worked out pretty well for him, seeing as he and Mrs. Hood were the board of directors. Mr. Hood earned a base salary of $169,000 and $197,000 in 2015 and 2016, respectively, and he earned $5 million bonuses in each year. Though the salaries were not out of the ordinary, prior to 2015, the bonus were much lower—$1.5 million (2014), $1 million (2013), $200,000 (2012), and often nothing (2010, 2009, 2004, 2003, 2002).

Guarantees of Bonding Claims

Under the petitioner’s agreement with its bonding companies, Mr. and Mrs. Hood agreed to guarantee any claim the bonding companies may have had against the petitioner during the review period for amounts beyond the petitioner’s ability to pay (surety bond guaranties). Mr. Hood also agreed to personally guarantee payment of some of the petitioner’s business loans, credit lines, and capital leases during the review period (debt guaranties), and the petitioner likewise lent money and extended credit to Mr. Hood and to some of his other business ventures during the review period (2000-2016). Before the years at issue petitioner never compensated Mr. Hood (or Mrs. Hood) for the debt guaranties or surety bond guaranties.

Worries about Undercompensation

In fall 2014, Mr. Phillips raised the issue of Mr. Hood’s historic compensation with petitioner’s accountants. Specifically, Mr. Phillips believed that Mr. Hood had been undercompensated in prior years, and he sought advice on how to compensate Mr. Hood moving forward. The accountants met with Mr. Hood and Mr. Phillips, and all agreed that Mr. Hood had undercompensated during the review period for the services he had previously rendered to the petitioner and that he deserved a bonus in the amount of $5 million pending follow-up analyses.

The $5 million amount was supported by an Excel spreadsheet (compensation due spreadsheet) created by Mr. Phillips.

The board of directors held a meeting on May 21, 2015, in which the board approved $5 million as a bonus to Mr. Hood for its 2015 tax year (2015 amount) “in grateful appreciation of the many years of sacrificial work done [by Mr. Hood] on the [c]ompany’s behalf” (backpay compensation). Reciting the same reasoning, petitioner’s board approved another $5 million as a bonus to Mr. Hood on May 20, 2016 (2016 amount).

Compensation to Others

Painter and Addley were compensated at the same rate – $114, 000 in 2013, $179,000 in 2014, $192,000 in 2015, and $233,645 in 2016. Mrs. Hood made less than $30,000 in each of 2010, 2011, 2012, and 2013. She earned $56,000 in 2014, $86,000 in 2015, and $105,000 in 2016. Phillips made $19,600 in 2010, rose to $51,00 in 2012, then to $74,000 in 2015, and finally $115,000 in 2016. Wesley (who left the company in 2011) made $52,000 in each of 2014, 2015, and 2016.

He didn’t “technically” provide “any material services to the petitioner” during these years. Incrementally higher bonuses were given between 2013 and 2016…but not to Mr. Hood’s family. They got nothing (in bonuses).

Notice of Deficiency and Petition

The IRS audited the petitioner’s Federal income tax returns and timely issued a notice of deficiency to the petitioner for the years at issue. The notice determined that portions of Mr. Hood’s purported compensation for the years at issue exceeded reasonable compensation under IRC § 162(a)(1) and disallowed these portions.

Specifically, the IRS allowed $517,964 of the $5,711,105 total amount petitioner reported as compensation for Mr. Hood for its 2015 tax year and $700,792 of the $5,874,585 total amount petitioner reported for its 2016 tax year. The notice determined total deficiencies of $1,581,202 and $1,613,308 for petitioner’s 2015 and 2016 tax years, respectively. The notice also included accuracy-related penalties under IRC § 6662 for underpayments due to substantial understatements of income tax.

In response to the notice of deficiency, petitioner timely filed a petition with this Court disputing the disallowed amounts and the penalties.

Examining IRC § 162(a)

Subchapter C corporations are subject to Federal income tax on their taxable income, which is their gross income less allowable deductions.^[1] A corporation may deduct all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation, e.g., bonuses, for personal services actually rendered.^[2] Whether payments are reasonable and purely for services is a question of fact to be determined from all the facts and circumstances of each particular case.^[3]

An employer may deduct compensation paid to an employee in a year although the employee may have performed the services in a prior year.^[4] The employer must show that the employee was not sufficiently compensated in the prior year and that the current year’s compensation was in fact to compensate for that underpayment.^[5]

Another consideration is whether the employee was also a shareholder of the corporation. Where officer-shareholders are in control of a closely held corporation and set their own compensation, careful scrutiny is required to determine whether the alleged deductible compensation is in fact a nondeductible dividend.^[6] An “ostensible salary” paid by a closely held corporation to one of its few shareholders is likely to constitute a disguised dividend where the amount is “in excess of those ordinarily paid for similar services and the excessive payments correspond or bear a close relationship to the stockholdings of the officers or employees.”^[7]

A “Multifactor” Approach

Certain courts, like the Fourth Circuit, examine multiple factors like the employee’s qualifications; the nature, extent, and scope of the employee’s work; the size and complexities of the business; a comparison of salaries paid with gross income and net income; the prevailing general economic conditions; comparison of salaries with distributions to stockholders; the prevailing rates of compensation for comparable positions in comparable concerns; and the salary policy of the taxpayer as to all employees.^[8]

In the context of small corporations with a limited number of officers, additional factors may include the amount of compensation paid to the particular employee in the previous years,^[9] as well as personal guaranties of debts or other obligations of the corporation.^[10] No single factor is decisive; instead, the Tax Court considers and weighs the totality of the facts and circumstances when making a decision.^[11] In doing so, the Tax Court may find certain factors less relevant or helpful than other factors when considering the facts necessary to reach a conclusion.^[12]

Independent Investor Test

Some Federal courts have supplemented, hybridized, or completely replaced the multifactor approach for analyzing the reasonableness of shareholder-employee compensation with the so-called independent investor test.^[13] Under this standard, a court typically asks whether an inactive, independent investor would be willing to compensate the employee as he was compensated.^[14] If so there may be a strong inference or even presumption under this test that the employee provided reasonable compensable services and that corporate profits are not being siphoned out as dividends disguised as salary.^[15]

The petitioner argued that the Tax Court should follow the independent investor test in determining whether the purported compensation paid to Mr. Hood in the years at issue was reasonable. While at least one Court of Appeals has found value in this approach, the Fourth Circuit has not adopted any iteration of the independent investor test.

Moreover, the Tax Court generally applies the multifactor approach unless a case is appealable to a Court of Appeals which has expressly applied the independent investor test.^[16] Accordingly, the Tax Court applied the multifactor approach to determine the reasonableness of the petitioner’s purported compensation paid to Mr. Hood on the basis of the precedent of the Tax Court and, more importantly, of the Fourth Circuit.^[17]

Mr. Hood’s Compensation

There is no doubt that Mr. Hood is the epitome of the American success story; his efforts directly contributed to petitioner’s prosperity during the review period. Furthermore, the parties do not dispute that Mr. Hood was entitled to some degree of additional compensation for the prior services he rendered as an employee of petitioner during portions of the review period.

Neither the Tax Court nor the IRS should substitute its own business judgment for that of the petitioner as to the setting of the appropriate amount of a given employee’s compensation; however, the Tax Court does examine the extent to which that compensation may be deducted for Federal income tax purposes because, as even petitioner recognizes, limits do exist for what may be reasonably deducted as compensation.^[18]

The IRS challenges whether the dramatic increase in Mr. Hood’s purported compensation in the petitioner’s 2015 and 2016 tax years constituted deductible compensation or a means of draining corporate profits through a disguised dividend.^[19]

Ultimately, the Tax Court held that the petitioner could not deduct the full amount of purported compensation paid to Mr. Hood because it failed to adequately establish how the entire amount was both reasonable and paid solely as compensation for his services to petitioner during the review period.

Mr. Hood’s Background and Qualifications

An employee’s superior qualifications for his or her position may justify high compensation.^[20] With over 50 years of relevant work experience, Mr. Hood had substantial knowledge and experience in both managing and performing land-grading and excavation work. Furthermore, he had developed an excellent reputation in his market, which allowed his eponymous company to compete for, and win, subcontracting jobs.

Nature, Extent, and Scope of Mr. Hood’s Work

An employee’s position, duties performed, hours worked, and general importance to the corporation’s success may justify high compensation.^[21] Mr. Hood was the petitioner’s key employee and driving force from its inception, and his personal services were essential to its success. He managed and built up the petitioner’s business, solicited and obtained the petitioner’s jobs, and supervised all work performed. Furthermore, he made the pivotal decision to sever petitioner’s business dealings with Walmart and transition to the commercial and industrial market sectors, which led to petitioner’s significant financial growth.

Size and Complexity of Petitioner’s Business

Courts may consider the size and complexity of a taxpayer’s business when deciding the reasonableness of compensation paid to its shareholder-employees.^[22] A company’s size is determined by its sales, net income, gross receipts, or capital value.^[23]

During the review period the petitioner experienced exceptional growth in terms of both employees and revenue. The workforce went from approximately 80 to 150 employees, and annual revenue jumped from as low as $9 million in 2003 to over $68 million by 2016. Even if the Tax Court were to assume that land excavation and grading does not require substantial scientific or technical knowledge, the petitioner’s work is more complex than that of a general construction company.^[24]

The petitioner specialized in the land grading and excavation field, which entails performance of the following services at exacting specifications: earth excavation, site clearing and grading, storm drainage, installation of water systems, installation of curbs and gutters, landscaping, and irrigation services. Through Mr. Hood’s contributions, the petitioner crafted a niche in that specialty by competing in a cost-effective manner and developing an unwavering reputation in its market.

Comparison of Mr. Hood’s Compensation to Petitioner’s Income

Although it is often helpful to consider compensation as a percentage of both gross receipts and net income, net income is usually more important because it more accurately gauges whether a corporation is disguising the distribution of dividends as compensation.^[25] A taxpayer’s pattern of attempting to distribute a significant portion of its net pretax income as deductible compensation to employee-shareholders rather than as nondeductible dividends such that the corporation has relatively little taxable income after deducting the “compensation” may be an indicator of a taxpayer’s disguising dividends as compensation.^[26] However, no particular ratio between compensation and gross or net taxable income is a prerequisite for a finding of reasonableness.^[27]

The petitioner paid approximately 42% and 26% of its pretax income to Mr. Hood as purported compensation in its 2015 and 2016 tax years, respectively. While such amounts are not insignificant, the Tax Court did not necessarily find them telling of an egregious pattern of disguised dividends as traditionally understood under this factor when considering that such amounts are principally meant to reflect compensation for Mr. Hood’s prior years of service during the review period.^[28]

Prevailing Economic Conditions

This factor helps to determine whether the success of a business may be attributable to the efforts and business acumen of the employee in question, as opposed to general economic conditions.^[29] Adverse economic conditions, for example, tend to show that an employee’s skill was important to a company that grew during bad economic years.^[30] The petitioner’s revenue increased from approximately $16 million to over $68 million during the review period, a trend that cannot be credited to economic conditions alone. It is therefore only fitting to recognize Mr. Hood’s contributions to the petitioner’s success outside of general economic conditions.

Comparison of Mr. Hood’s Compensation with Distributions to Stockholders

It is not a legal requirement for a corporation to pay dividends as shareholders are often content with the appreciation in the value of their stock that arises through retention of earnings.^[31] However, a complete absence of dividends to shareholders out of available profits justifies an inference that some of the purported compensation paid to a shareholder-employee represents a distribution of profits.^[32]

The petitioner in  was profitable during the review period, especially in the years at issue, but never declared or paid a cash dividend. Some of petitioner’s claimed reasons for not doing so, e.g., to meet working capital needs during the Great Recession and maintain a competitive edge through strong balance sheets, were certainly persuasive when considering tax years such as 2010 in which business was slow and capital needs were high.

These reasons, however, can be carried only so far before they start to lose their appeal after taking into account:

1. Mr. Hood’s decision, as controlling shareholder of the petitioner, to defer monetary recognition through a dividend for his investment for the entire 16-year review period; and
2. The petitioner’s decision to not recognize those deferrals through a dividend but instead reward Mr. Hood exclusively through a purported bonus after it had acquired sufficient capital and cash in the years at issue to do so.^[33]

Prevailing Rates of Compensation for Comparable Positions in Comparable Concerns

In deciding whether compensation to an employee is reasonable, we compare it to compensation paid to persons holding comparable positions in comparable companies.^[34] Courts frequently place great emphasis on this factor.^[35] In assessing this factor, we consider the testimony of the parties’ expert witnesses. As trier of fact, the Tax Court is not bound by the opinion of any expert witness and will accept or reject expert testimony, in whole or in part, in the exercise of sound judgment.^[36]

Petitioner’s Salary Policy as to All Employees

Courts have considered salaries paid to other employees of a business in deciding whether compensation is reasonable.^[37] The Tax Court looks to this factor to determine whether Mr. Hood was compensated differently from the petitioner’s other employees solely because of his status as a shareholder.^[38]

The petitioner had no structured system in place for the setting of its nonshareholder employee compensation. Mr. Hood personally set the salary and bonus amounts of other employees and officers and testified that he based these decisions on his own subjective belief as to the individual’s “work records”, “ability to get along with people”, and “pride in the company.”

Mr. Hood’s salary and bonus in the years at issue represented almost 90% of the total amount of compensation that the petitioner paid to its officers despite the fact that nonshareholder officers such as Mr. Painter and Mr. Addley worked nearly the same number of hours as Mr. Hood and shared in many of Mr. Hood’s responsibilities.

The petitioner had no agreement in place with Mr. Hood regarding his compensation. Mr. Hood’s compensation during the review period was instead set by him along with his wife in their roles as the petitioner’s board of directors. Because such conditions can be ripe for the existence of disguised dividends,^[39] the Tax Court examined further the specific circumstances surrounding the setting of Mr. Hood’s compensation in the years at issue.

Mr. Hood’s Prior Compensation

Where a large salary increase is in issue (as in the case at hand), it may be useful to compare past and present duties and salary payments,^[40] to determine whether and to what extent the current payments represent compensation for services performed in prior years that can be currently deductible.^[41]

Mr. Hood’s total purported compensation increased over 300% in petitioner’s 2015 tax year, its most profitable year to date, yet there was no corresponding increase in Mr. Hood’s duties or responsibilities in that year.^[42] The stated justification per the corporate minutes for this increase is that Mr. Hood was undercompensated in prior years.

While the Tax Court did not disagree that Mr. Hood was undercompensated in certain years of the review period, this does not entitle petitioner to carte blanche in deducting Mr. Hood’s backpay bonus amount,^[43] and the Tax Court viewed such board minutes statements like these with a certain degree of skepticism.^[44] Moreover, the petitioner did not sufficiently demonstrate through reliable means how the full amount of each of the 2015 and 2016 amounts was proportionate in value to each of the purported past services rendered by Mr. Hood.^[45]

Mr. Hood’s Personal Guaranty of Petitioner’s Debts and Bonding Obligations

The petitioner’s justification for Mr. Hood’s higher compensation for the years at issue includes Mr. Hood’s debt guaranties and surety bond guaranties during the review period. Guaranty fees may qualify as a deductible business expense under IRC § 162(a).^[46] This Court has taken into account some of the following considerations when deciding the deductibility of such fees paid to a shareholder-employee:

1. Whether the fees were reasonable in amount given the financial risks;
2. Whether businesses of the same type and size as the payor customarily pay such fees to shareholders;
3. Whether the shareholder-employee demanded compensation for the guaranty;
4. Whether the payor had sufficient profits to pay a dividend but failed to do so; and
5. Whether the purported guaranty fees were proportional to stock ownership.^[47]

The record shows that it is customary for the owners of construction companies to guarantee debts and bonds, and that compensation for these guaranties is appropriate. Further, the IRS’s expert witness, Mr. Fuller, found that the compensation petitioner paid to Mr. Hood in the years at issue for his surety bond guaranties was reasonable.

The Tax Court recognized that Mr. Hood historically did not seek compensation for the guaranties and the petitioner had sufficient profits to pay a dividend during the years at issue; however, the Tax Court placed more weight on the customary nature and reasonableness of the fees.

Conclusion

When the Tax Court considered the totality of the factors discussed above, it concluded that the petitioner has not adequately established how the amounts paid to Mr. Hood during the years at issue were both reasonable and paid solely as compensation for his services to the petitioner during the review period. While certain factors favor the petitioner, the Tax Court does not simply sum which party had the most factors in reaching our conclusion as not all factors are afforded equal weight.^[48]

Here, the factors addressing comparable pay by comparable concerns, the petitioner’s shareholder distribution history, the setting of Mr. Hood’s compensation in the years at issue, and Mr. Hood’s involvement in the petitioner’s business were the most relevant and persuasive factors in reaching our conclusion.

In determining the appropriate dollar amount, the Tax Court found the IRS’s expert’s testimony most helpful. He considered the multifactor approach, included compensation for the surety bond guaranties, and offered a well-reasoned comparison of petitioner and Mr. Hood’s salary against industry standards. Accordingly, the Tax Court held that the record supports reasonable compensation of $3,681,269 for tax year 2015 and $1,362,831 for tax year 2016.

(T.C. Memo. 2022-15) Clary Hood Inc. v. Commissioner

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Footnotes:

1. See IRC §§ 11(a), 61(a), 63(a). ↑
2. IRC § 162(a)(1); Treas. Reg. § 1.162-7(a); Treas. Reg. § 1.162-9. ↑
3. Martens v. Commissioner, 934 F.2d 319, *8 (4th Cir. 1991), aff’g per curiam T.C. Memo. 1990-42; Am. Sav. Bank v. Commissioner, 56 T.C. 828, 843 (1971); see also Treas. Reg. § 1.162-7(b)(3) (providing that reasonable and true compensation is only such an amount “as would ordinarily be paid for like services by like enterprises under like circumstances”). ↑
4. Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 119 (1930), aff’g Ox Fibre Brush Co. v. Blair, 32 F.2d 42 (4th Cir. 1929), rev’g 8 B.T.A. 422 (1927); R.J. Nicoll Co. v. Commissioner, 59 T.C. 37, 50 (1972). ↑
5. Estate of Wallace v. Commissioner, 95 T.C. 525, 553-54 (1990), aff’d, 965 F.2d 1038 (11th Cir. 1992). ↑
6. Richlands Med. Ass’n v. Commissioner, 953 F.2d 639, *2 (4th Cir. 1992), aff’g per curiam T.C. Memo. 1990-660; Estate of Wallace, 95 T.C. at 556. ↑
7. Treas. Reg. § 1.162-7(b)(1). ↑
8. Richlands Med. Ass’n, 953 F.2d 639, *2. ↑
9. Mayson Mfg. Co. v. Commissioner, 178 F.2d 115, 119 (6th Cir. 1949). ↑
10. E.J. Harrison & Sons, Inc. v. Commissioner, T.C. Memo. 2003-239, *14-*16, aff’d in part, rev’d in part and remanded on another issue, 138 F. App’x 994 (9th Cir. 2005). ↑
11. Martens, 934 F.2d 319, at *9. ↑
12. See Medina v. Commissioner, T.C. Memo. 1983-253. ↑
13. See Metro Leasing & Dev. Corp. v. Commissioner, 376 F.3d 1015, 1019 (9th Cir. 2004) (noting that the independent investor test is but one of many factors to be considered when assessing the reasonableness of an executive officer’s compensation), aff’g 119 T.C. 8 (2002); Haffner’s Serv. Stations, Inc. v. Commissioner, 326 F.3d 1, 3-4 (1st Cir. 2003), aff’g T.C. Memo. 2002-38; Exacto Spring Corp. v. Commissioner, 196 F.3d 833, 838 (7th Cir. 1999), rev’g Heitz v. Commissioner, T.C. Memo. 1998-220; Dexsil Corp. v. Commissioner, 147 F.3d 96, 101 (2d Cir. 1998); Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d 1315, 1327 (5th Cir. 1987), aff’g T.C. Memo. 1985-267. ↑
14. Elliotts, Inc. v. Commissioner, 716 F.2d 1241, 1245 (9th Cir. 1983), rev’g T.C. Memo. 1980-282. ↑
15. See id. at 1247. ↑
16. See, e.g., Pepsi-Cola Bottling Co. of Salina v. Commissioner, 61 T.C. 564, 567 (1974) (noting that it is “well settled” that the Court should consider the multifactor approach in reasonable compensation cases), aff’d, 528 F.2d 176, 179 (10th Cir. 1975); Beiner, Inc. v. Commissioner, T.C. Memo. 2004-219, *15 (refusing to apply the independent investor test exclusively by finding comparative industry salaries the most relevant factor in that case). ↑
17. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). ↑
18. Accord Owensby & Kritikos, Inc., 819 F.2d at 1325. ↑
19. See Nowland v. Commissioner, 244 F.2d 450, 455 (4th Cir. 1957), aff’g T.C. Memo. 1956-72; Ox Fibre Brush Co., 32 F.2d at 45. ↑
20. See Home Interiors & Gifts, Inc. v. Commissioner, 73 T.C. 1142, 1158 (1980); Wagner Constr., Inc. v. Commissioner, T.C. Memo. 2001-160, *22. ↑
21. K & K Veterinary Supply, Inc. v. Commissioner, T.C. Memo. 2013-84, at *12 (citing Charles Schneider & Co. v. Commissioner, 500 F.2d 148, 152 (8th Cir. 1974), aff’g T.C. Memo. 1973-130). ↑
22. See Richlands Med. Ass’n, 953 F.2d 639, at *2; RTS Inv. Corp. v. Commissioner, 877 F.2d 647, 651 (8th Cir. 1989), aff’g T.C. Memo. 1987-98. ↑
23. See Beiner, Inc., T.C. Memo. 2004-219, at *12; Wagner Constr., Inc., T.C. Memo. 2001-160, at *23. ↑
24. See Choate Constr. Co. v. Commissioner, T.C. Memo. 1997-495 (finding greater complexity in specialty construction firms). ↑
25. See, e.g., Richlands Med. Ass’n, 953 F.2d 639, at *2; Wagner Constr., Inc., T.C. Memo. 2001-160, at *25. ↑
26. See Alpha Med., Inc. v. Commissioner, 172 F.3d 942, 948 (6th Cir. 1999), rev’g on other grounds T.C. Memo. 1997-464; Aspro, Inc. v. Commissioner, T.C. Memo. 2021-8, at *44-*45. ↑
27. See Owensby & Kritikos, Inc., 819 F.2d at 1326. ↑
28. Cf. Aspro, Inc., at *45 (holding taxpayer’s total shareholder “compensation” of 90%, 100%, and 67% of net income to be unreasonable); Miller & Sons Drywall, Inc. v. Commissioner, T.C. Memo. 2005-114, *13 (holding shareholder “compensation” of 89%, 108%, and 74% of net income to be unreasonable). ↑
29. Wagner Constr., Inc., T.C. Memo. 2001-160, at *23. ↑
30. Id. ↑
31. Estate of Wallace, 95 T.C. at 559. ↑
32. Paul E. Kummer Realty Co. v. Commissioner, 511 F.2d 313, 315 (8th Cir. 1975), aff’g T.C. Memo. 1974-44; Nor-Cal Adjusters v. Commissioner, 503 F.2d 359, 362-363 (9th Cir. 1974), aff’g T.C. Memo. 1971-200; Charles Schneider & Co., 500 F.2d at 153 (noting this fact to be “[p]erhaps [the] most important” in finding purported shareholder compensation represented disguised distributions); Estate of Wallace, 95 T.C. at 559; Aspro, Inc., at *22-*23. ↑
33. See Mulcahy, Pauritsch, Salvador & Co. v. Commissioner, 680 F.3d 867, 873 (7th Cir. 2012) (“When a person provides both capital and services to an enterprise over an extended period, it is most reasonable to suppose that a reasonable return is being provided for both aspects of the investment, and that a characterization of all fruits of the enterprise as salary is not a true representation of what is happening.” (quoting 1 Boris I. Bittker & Lawrence Loken, Federal Taxation of Income, Estates & Gifts, para. 22.2.2, at 22-26 (3d ed. 1999))), aff’g T.C. Memo. 2011-74. ↑
34. Mayson Mfg. Co., 178 F.2d at 119; Pepsi-Cola Bottling Co. of Salina, 61 T.C. at 567; Treas. Reg. § 1.162-7(b)(3). ↑
35. See, e.g., Rutter v. Commissioner, 853 F.2d 1267, 1273 (5th Cir. 1988) (observing that courts have viewed this factor as the most relevant), aff’g T.C. Memo. 1986-407. ↑
36. Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938); Estate of Hall v. Commissioner, 92 T.C. 312, 338 (1989); Parker v. Commissioner, 86 T.C. 547, 561 (1986). ↑
37. See Home Interiors & Gifts, Inc., 73 T.C. at 1162. ↑
38. See Northlich, Stolley, Inc. v. United States, 368 F.2d 272, 278 (Ct. Cl. 1966) (finding a constructive dividend where compensation paid to stockholding officers greatly exceeded that of nonstockholding employees). ↑
39. See, e.g., Estate of Wallace, 95 T.C. at 553-54. ↑
40. Elliotts, Inc., 716 F.2d at 1245. ↑
41. Ox Fibre Brush Co., 281 U.S. at 119-20. ↑
42. See Miles-Conley Co. v. Commissioner, 173 F.2d 958, 960 (4th Cir. 1949) (finding that where a taxpayer’s sole stockholder had been paid much less for his service in the same position in previous years, and his compensation increased dramatically when the corporation’s profits increased, an inference is warranted that the taxpayer’s sole stockholder was attempting to drain off the corporate profits in the guise of salary), aff’g 10 T.C. 754 (1948). ↑
43. See Owensby & Kritikos, Inc., 819 F.2d at 1325 (“[L]imits to reasonable compensation exist even for the most valuable employees.”) ↑
44. See United States v. Smith, 418 F.2d 589, 593-594 (5th Cir. 1969). ↑
45. See Botany Worsted Mills v. United States, 278 U.S 282, 293 (1929); Estate of Wallace, 95 T.C. at 553-54; Woesner Abstract & Title Co. v. Commissioner, T.C. Memo. 1983-764. ↑
46. See R.J. Nicoll Co., 59 T.C. at 51-52; A.A. & E.B. Jones Co. v. Commissioner, T.C. Memo. 1960-284. ↑
47. Fong v. Commissioner, T.C. Memo. 1984-402, aff’d without published opinion, 816 F.2d 684 (9th Cir. 1987). ↑
48. See Medina v. Commissioner, T.C. Memo. 1983-253. ↑

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