Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

10) relationship of stockholder-officer’s compensation to stock holdings,
11) whether alleged compensation is in reality, in whole or in part, payment for a
business or assets acquired, and
12) the amount paid by similar size businesses in the same area to equally qualified
employees for similar services.
b. Judicial Factors
2. Pre-Audit
The factors generally considered relevant by the courts, which are set forth in Good
Chevrolet v. Commissioner, T.C. Memo. 1977-291, CCH 34,606(M), include:
1) the employee’s qualifications,
2) the nature, extent and scope of the employee’s work,
3) the size and complexities of the business,
4) a comparison of salaries paid with the gross income and the net income,
5) the prevailing general economic conditions,
6) comparison of salaries with distributions to stockholders,
7) the prevailing rates of compensation for comparable positions in comparable
concerns,
8) the salary policy of the taxpayer as to all employees, and
9) in the case of small corporations with a limited number of officers the amount of
compensation paid to the particular employee in previous years.
During pre-audit the agent can use the following ratios in considering the merits of raising the
issue:
a. compensation to gross sales,
b. compensation to gross profits,
c. compensation to taxable income,
d. compensation to that of other employees within the corporation, and
e. taxpayer’s compensation to that of similar officers within the industry.
Such ratios can be obtained from third party publishers, e.g., "Dun and Bradstreet, Robert
Morris Associates, Almanac of Business and Industrial Financial Ratios, NADA Data, etc."
3. Examination
The IRM advises to be alert for any officer’s compensation claimed under headings other than
officer’s salaries, such as manufacturing salaries, supervisory salaries, labor, contributions to
pension plans for the officers, payments of personal expenses, yearend bonuses, etc. It also
advises to be alert to closely held multiple corporation situations in which compensation may
be split between two or more related corporations, and which in the aggregate, may be
considered excessive.
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