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?

---

Definitions:

Ebbinghaus

Hermann Ebbinghaus, a German psychologist known for his pioneering work on memory and the forgetting curve.

Nonsense Syllables

Meaningless sets of two or three letters that are used in memory and learning experiments to study the learning process.

Memory

The mental ability that allows for the keeping, maintaining, and recovering of information throughout time.

Effortful Processing

Encoding that requires attention and conscious effort.