Strong Corporation Is Owned by a Group of 20 Shareholders

question 26

Essay

Strong Corporation is owned by a group of 20 shareholders. During the current year, Strong Corporation pays $225,000 in salary and bonuses to Stedman, its president and controlling shareholder. The IRS audits Strong's tax return and determines that reasonable compensation for Stedman would be $125,000. Strong Corporation agrees to the adjustment.
a)What effect does the disallowance of part of the deduction for Stedman's salary and bonuses have on Strong Corporation and Stedman?
b)What tax savings could have been obtained by Strong Corporation and Stedman if an agreement had been in effect that required Stedman to repay Strong Corporation any amounts determined by the IRS to be unreasonable?

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Definitions:

Trademark

A distinctive sign, symbol, or phrase legally registered or established by use as representing a company or product.

Domain Name

A unique address on the internet that identifies a website and typically consists of a website name and a domain extension like .com or .net.

Due Process Clause

A clause in the Fifth Amendment of the U.S. Constitution providing that the government cannot deprive an individual of life, liberty, or property without a fair and just hearing.

Involuntarily Transfer

The forced transfer of an asset or property without the owner's consent, often due to legal actions like bankruptcy or foreclosure.