Is That Reasonable?

Previously, I have commented on the growing number of controversies over whether owners of closely held businesses are paying themselves unreasonably low salaries in order to avoid FICA tax liabilities. The U.S. Court of Appeals for the First Circuit just issued an opinion that imposed heavy penalties on a closely held business for paying unreasonably high salaries.

The case is notable because the court adopted a multi-factor test to determine whether the compensation was reasonable, specifically rejecting the "independent investor" test articulated by Judge Posner of the Seventh Circuit in Seventh Circuit, Exacto Spring Corp. v. Commissioner, 196 F.3d 833 (1999).

The case is Haffner's Service Stations, Inc. v. Commissioner (Case No. 02-1761, March 31, 2003) and a copy of the opinion can be obtained through the First Circuit's website.