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:

Mutual Exclusivity Assumption

A concept in language acquisition where young children assume that objects only have one label.

Infant-Directed Speech

A special, modified way of speaking adults use when talking to babies, characterized by higher pitch, slower rate, and exaggerated intonation, thought to aid language learning.

Pragmatics

The aspect of language involving the practical use of speech and communication in context, including tone, social cues, and conversation skills.

Contrast Assumption

The idea that people make judgments about an event or situation by comparing it to something else, rather than evaluating it in isolation.