Opinion ID: 489299
Heading Depth: 2
Heading Rank: 3

Heading: Compensation as a Percentage of Gross and Net Income

Text: 40 The record shows that the compensation paid by the corporations on a combined basis to the shareholder-employees in 1978 and 1979 constituted 12.3 percent and 9.0 percent respectively of the consolidated gross receipts and 53.7 percent and 65.1 percent respectively of the consolidated taxable income before deducting their salaries. Although it is often helpful to consider compensation as a percentage of both gross receipts and net income, the latter is in most cases more probative because it more accurately gauges whether a corporation is disguising the distribution of dividends as compensation. 34 41 The trial court noted the existence of a pattern on the part of the corporations as a consolidated entity to distribute most of their taxable income as compensation to their shareholder-employees. In Good Chevrolet v. Commissioner, 35 the Tax Court concluded that compensation to shareholder-employees constituting approximately 60 percent of net income was reasonable. 36 The taxpayers suggest that Good Chevrolet establishes a reasonableness benchmark and therefore strongly supports their position that the compensation paid by the corporations was reasonable. We must disagree. Even in Good Chevrolet, the Tax Court noted that 60 percent of net income was a large portion. 37 More fundamentally, and as noted previously, each case turns on its own facts and circumstances. We conclude that in this case the large portion of net income paid in compensation to the shareholder-employees of the corporations was appropriately considered by the trial court as one factor pointing toward the conclusion that the compensation paid was in part unreasonable.