Eighth Circuit Affirms District Court in S Corporation Reasonable Compensation Case

February 21, 2012

Last fall, we covered Watson v. United States, at the tax schools. That’s the case involving the question of reasonable compensation in an S corporation – the issue that former Senator and Presidential candidate John Edwards has become the poster child for. He ran his law practice through an S corporation and took the majority of his earnings out of the S corporation in the form of distributions that aren’t subject to payroll tax. Warren Buffet does the same thing with his company, Berkshire Hathaway. He only takes a salary of approximately $100,000, roughly the FICA tax wage base. The United States Court of Appeals for the Eighth Circuit has now affirmed the trial court’s decision in Watson that the shareholder was paid an unreasonably low salary.

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