According to Levitt (2013) challenges of unreasonable compensation deductions by the IRS are increasing as a result of the tax rate increases and new taxes under the American Taxpayer Relief Act of 2012 (ATRA). In Mulcahy, Pauritsch, Salvador & Co., Ltd. v. Commissioner, 680 F.3d 867 (7th Cir. 2012), aff’g, T.C. Memo 2011-74 (2011), the IRS challenged deductions taken by an accounting firm, organized as a C corporation, for consulting fees that it paid to entities owned by its founding shareholders, in addition to salaries that it paid directly to them. First explain why you think the courts ruled in favor of the IRS on this case. Next discuss the advice you would provide clients of closely held corporations on avoiding tax issues on unreasonable compensation
IRS “unreasonable compensation” challenges likely to increase
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