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:

Genital Tubercle

Median elevation just cephalic to the urogenital orifice of an embryo; gives rise to the penis of the male or the clitoris of the female.

Clitoris

Small, cylindrical, erectile body, rarely exceeding 2 cm in length, situated at the most anterior portion of the vulva and projecting beneath the prepuce.

Parturition

The act or process of giving birth; the delivery of a fetus by a female mammal.

Amniotic Sac

is a fluid-filled sac that surrounds and protects the embryo or fetus in the uterus during pregnancy, providing a safe environment for development.