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:

Recession

A significant decline in economic activity spread across the economy, lasting more than a few months, typically visible in real GDP, income, employment, industrial production, and wholesale-retail sales.

Maximum Purchase Price

The highest price a buyer is willing to pay for an asset or property.

Pre-Merger Value

The valuation of a company or asset prior to undergoing a merger or acquisition.

Acquiring Firm

A company that purchases another company in a merger or acquisition to expand its operations or enter new markets.