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:

Day-Neutral

Plants that flower regardless of the length of the day, not specifically triggered by long or short day lengths.

Long-Day

Pertains to plants that require a longer period of daylight exposure to flower or complete specific stages of growth.

Short-Day

Refers to plants that require long nights and shorter periods of daylight to flower or complete their life cycle.

Asexual Reproduction

A mode of reproduction by which offspring arise from a single organism, inheriting the genes of that parent only, seen in many plants and some animal species.