reasonable compensation

With this post, we continue to examine transactions between the closely-held business and its owners.  As we saw last week, special scrutiny is given in situations where a business is controlled by the individual with whom it engages in a transaction because there is a lack of arm’s-length bargaining.  That is certainly the case

Transactions between a closely held business and its owners will generally be subject to heightened scrutiny by a taxing authority, and the labels attached to such transactions by the parties have limited significance unless they are supported by objective evidence. Thus, arrangements that purport to provide for the payment of compensation, dividends, rent, interest, etc.,

In the recent case Thousand Oaks Residential Care Home I, Inc. v. Commissioner, the Tax Court considered whether a corporation’s compensation packages for its owner-employees were unreasonable and thus disallowable as deductions.  The facts can be summarized as follows: in 1973, Petitioners “Mr. and Mrs. F.” purchased a struggling corporation called Thousand Oaks Residential