Ryan M. Vassar (J.D. 2011, South Texas) has posted Economically Analyzing the Definition of ‘Reasonable Compensation’ as It Relates to Employment-Tax Liability Under the Analysis of David E. Watson, P.C. v. United States on SSRN. Here is the abstract:
This note analyzes the “definition” of “reasonable compensation” under the IRS’s revenue ruling and how the Tax Code applies that definition in determining employment-tax liability. The revenue ruling requires compensation to shareholder-employees of a small corporation to be reasonable. The IRS’s subsequent re-characterization of “unreasonable” payments – i.e., those that should have been originally characterized as wages – subjects the re-characterized portion to penalties, interest, and additional taxes; specifically, taxes under the FICA. The case, here, involves a shareholder-employee of a Subchapter S corporation. The IRS challenged the shareholder-employee’s amount of FICA-tax liability after determining his salary was unreasonably low, by re-characterizing a portion of his distributions, or dividends, he received from his S-corporation.
Prior TaxProf Blog coverage:
- Court Gives IRS Rare Win in ‘John Edwards Sub S Tax Shelter’ Case (Jan. 24, 2011)
- More on the ‘John Edwards Sub S Tax Shelter’ (Feb. 6, 2011)
