Two experts are more reasonable than one.

• Author: Hogle, William
• Position: Executive compensation

A closely held corporation successfully defended its compensation policy against IRS challenge in Automotive Investment Development, Inc., TC Memo 1993-298.

In this case, the Tax Court used five factors to evaluate the reasonableness of the compensation. 1. The employee's qualifications and role in the company. 2. The company's character and condition. 3. The compensation for comparable positions in similar companies. 4. The company's salary policy and the employee's salary history. 5. An independent investor standard.

Even though the shareholder's compensation was based largely on a bonus equal to a percentage of profits, the court looked to see if the formula was within industry norms and if the amount paid reflected the value of the services provided. The court listened favorably to the industry-specific testimony of one of the taxpayer's two expert witnesses. Moreover, it described as "doubtful" the value of the other experts' nonindustry-specific testimony. After considering the five factors, the Tax Court held that the taxpayer was entitled to the full deduction claimed on the returns.

During 1984 and 1985, Larry Van Tuyl was the sole shareholder and president of Automotive Investment Development, Inc. (Automotive). Automotive invested in and managed automobile dealerships and related entities, including Dennis Chevrolet, Inc. (Dennis Chevrolet) and ABC Datsun, Inc. (ABC Datsun). Van Tuyl's salary at issue consisted of a base salary of $7,000-$8,000 per month plus a bonus equal to 28% of the pretax profit of Dennis Chevrolet and ABC Datsun. The salary agreement also provided that his salary would decrease by the same percentage of any pretax losses. Based on the formula, Van Tuyl's total compensation was approximately $1.7 million for 1984 and $2.1 million for 1985. During 1984 and 1985, Automotive did not provide stock options, a pension plan or other deferred compensation to Van Tuyl. The IRS determined that the maximum reasonable compensation was $508,000 for 1984 and $872,000 for 1985. Analysis of Automotive Investment Development An employee's qualifications and role in the company: These include consideration of position, hours worked, duties performed, overall contribution to the company's success and whether the employee is irreplaceable. The Tax Court agreed that Van Tuyl was largely responsible for Automotive's success. When acquired by Automotive, Dennis Chevrolet was at or near the bottom of its market, and ABC Datsun was...