Sweet Vinegar at Least?

Glynn Shaw of San Clemente, California writes and notes that: "However, the payment of a 'reasonable' salary together with the 'correct' pension plan can significantly reduce and defer the tax burden. For 'reasonable' I use government statistics on salaries and wages published on the Internet. It is my view that the government can not easily dispute statistical data [it] maintain[s]."

I think that this is a start, but I am not certain that I fully agree. For instance, assume that Dr. X has a practice that grosses 2.5 times the national average gross for his/her specialty. I would think that, under the circumstances one cannot credibly argue that the national average net for the specialty is all that Dr. X's professional corporation needs to pay him/her to avoid the attack mounted in Veterinary Surgical and Yeagle.

I would note also that there is an older case, Spicer Accounting, Inc. v. Commissioner, 918 F.2d 90 (9th Cir. 1990) where the court focused on the fact that capital was not integral to the success of the business (the operation of an accounting practice) and that "Mr. Spicer's services were integral to the operation of Taxpayer, as he was the only accountant in the accounting concern, the only one who signed customers' returns as preparer, the only one who performed financial planning for the firm, and the only one who audited clients' books." In other words, the question of whether his salary was "reasonable" did not factor into the determination. If there was a direct correlation between his efforts and the profitability of the practice, all of those profits are subject to FICA.

Finally, there is even an earlier case, Joseph Radtke, S.C. v. U.S., 895 F.2d 1196 (7th Cir. 1990) that presented a similar fact pattern and reached an identical conclusion.

Based on decided case law, I believe that one must tie any dividend return to some reasonable return on invested capital, not merely take the position that the amounts paid as wages are, based on general indices, reasonable.