Unreasonable compensation for employee-stockholders of a professional corporation: it is not an unreasonable proposition.

The IRS has various weapons at its disposal in combating the perceived abuses of personal service corporations (PSCs), including Sec. 269A, enacted with much fanfare in the Technical and Fiscal Responsibility Act of 1982, but little used; the required year of Sec. 441(i), added by the Tax Reform Act of 1986 (TRA), as modified by Sec. 444; and the repeal under Sec. 11(b)(2) of the graduated corporate rates for PSCs by the Revenue Act of 1987. Lost, perhaps, in the flurry of statutory activity is the possible claim of unreasonable compensation in the event of an examination by the IRS. Personal service corporations are under increased scrutiny as a result of the Jerome Mirza and Associates, Ltd. (1) case and the IRS's small defined benefit plan audit program. (2) (Several test cases are to be heard in the Tax Court in early 1992.) This article will examine the factors involved in reasonable compensation cases in general and how they might apply to a professional corporation, and offer pointers in preparing for an examination or Appeals Protest.

Overview

There is a notable lack of case history involving claims of unreasonable compensation against personal service corporations, and for good reason. The success of the corporation is generally directly related to the efforts of the individual professional, and compensation generally reflects that success. The right of professionals to practice in corporate form is well established by virtue of the long line of cases following the Kintner (3) decision. At the time of the Kintner decision, much more favorable retirement plan options were available to incorporated businesses than to unincorporated ones, and this drove professionals to seek corporate status. Despite changes in many state corporate statutes permitting professionals to practice in corporate form, the IRS steadfastly maintained that it would not recognize such entities as corporations for federal tax purposes, treating them as partnerships instead. The IRS even went so far as to issue anti-Kintner regulations after the decision. These regulations were likewise overturned by the courts.

Nowadays, physicians, attorneys, accountants and other professionals primarily use the corporate form in an attempt to limit general (as opposed to professional) liability and obtain certain fringe benefits, notably health insurance, not fully deductible in a partnership or S corporation setting.

The Service and the courts regard the existence of a corporation as evidence of a corporate profit motive, in addition to the individual salary motivations of the stockholder/employees. It is important to remember this position in any tax planning surrounding the reasonable compensation issue. A common profit motive is one of the four factors considered in determining whether an entity is a partnership or corporation. The taxpayer thus has the burden of establishing the premise that all the net earnings available before stockholder compensation should be considered as salary and not as a dividend.

Characteristics of a PSC 

Capital is usually not a material income-producing factor in a small professional practice. The services provided by nonprofessional employees are often in the nature of administration and support and do not generate revenue. The main source of revenue in a small firm comes from the efforts of the principals. There is a direct "one-to-one" relationship between the number of patients/clients the professional has and the amount of fee income earned by the taxpayer. Likewise, there should be an unequivocal requirement that the compensation earned by the professional reflect that one-to-one relationship. The more clients receiving services, therefore, the more income the professional is entitled to earn. In Eduardo Catalano, Inc., Pension Trust, which involved a oneman professional corporation engaged in architecture, the Tax Court stated: "As the sole employee of ECI [Catalano] is the fount of that company's income. In light of the fact that ECI had adequate resources from which it could pay Mr. Catalano . . . , it is difficult to support a finding that such payments were unreasonable in amount." (4)

Larger practices, notably of lawyers and accountants, and increasingly of physicians, do not fit this small firm picture. Capital may, in fact become a material income-producing factor. large investments in computers and other business equipment, along with furnishings, are common to all the professions. Group practices of physicians may acquire substantial amounts of laboratory, radiographic and other equipment on which the fee income may, in part, be based. "Buyins" based on the tangible asset cost, as well as goodwill, may lend credibility to an argument by the Service that "distributions" labeled as compensation are in fact a distribution on invested capital, i.e., a dividend.

All of these professions afford the opportunity for "leveraging" of associates and staff people through billing rates or similar arrangements. The "profits" on these revenue centers are paid to the employee-owners as compensation, along with their direct earnings from client or patient service activities. Compensation plans, which allocate income in whole or in part, using a partner's client base, capital account balance and other factors not based on individual productivity, (5) may also lend credibility to the argument that certain distributions should be regarded as dividends. The prior services argument (discussed below) may be of value in attributing compensation to the client base portion of a stockholder's total earnings.

What Is Compensation?

Compensation includes more than just W-2 earnings. Pension and profit-sharing contributions are part of compensation in making a determination of reasonableness. Fringe benefits such as various group insurances, medical reimbursement plans and unfunded deferred compensation plans also need to be included. Taxpayers who used defined benefit plans with what are now seen as aggressive funding factors in light of recent legislative and audit attacks may be at risk for unreasonable compensation. The IRS's small defined benefit plan audit program, aimed at raising approximately $600 million in revenue as a result of its success in the Mirza case, may also be the source of unreasonable compensation cases.

In Mirza, a self-employed attorney established a defined benefit plan covering himself and one employee. The actuary computed a liability in excess of $500,000, all of which was paid and deducted in a single year. A substantial net operating loss carryback resulted and refunds were paid by the IRS. The court upheld the IRS's denial of the deduction on a variety of legal theories, including failure to amortize prior service cost and the use of a 5% assumed rate of return when 30-year Treasury bonds were yielding 14%. (Note that 30-year Treasury bonds have recently been yielding in the range of 7.5%.) The use of such plans, primarily by both incorporated and unincorporate small business owners, will result in the audit of many PSCs. (The lack of a retirement plan influenced the court's assessment of the reasonableness of salary and bonus payments in the Rutter (6) case, discussed below.)

Basic factors supporting reasonableness

An IRS claim of untreasonable compensation must be evaluated in light of the nature of the business and the type of service required of the emloyee, among other factors. Exhibit I, above, lists all nine factors (the "Mayson" factors) established in Mayson Manufacturing Co., (7) the leading case on the reasonable compensation matter. Mayson involved the compensation paid the three principal officers and stockholders of a manufacturing concern pursuant to a bonus system established by the corporation's board of directors. During World War II, the company earned substantial amounts of money, in part due to the production volume generated by the war effort. The Service attacked the bonus arrangement on a variety of grounds, including the source of the excess earnings (war profuction) and the reasonableness of the bonus plan itself. The taxpayer prevailed when the Sixth Circuit overturned the Tax Court's calculation of reasonable compensation.

The Mayson case provides practitioners with a reference for determining the factors relevant to an unreasonable compensation case and an opportunity to document them before the onset of an audit.

The employee's qualifications: An up-to-date resume or curriculum vitae (CV) can be an excellent record of qualifications, and should be part of the documentation of compensation. in addition to the ordinary material about undergraduate and graduate education, other detailed data should be gathered. Since accountants do not ordinarily maintain a CV (as would a physician, for example), it might be advisable to use records of continuing professional education required by various state boards of accountancy and the AICPA as a source of similar data. This is of particular value if such records demonstrate a pattern of developing special expertise in one or more areas leading to such factors as a higher billing rate or generation of clients. Articles about the individual in local or professional publications might also highlight this area. Practitioners should not be bashful in preparing for a potential defense of a client or themselves.

The nature, extent and scope of the employee's work; the size and complexities of the business: These two factors are perhaps intertwined as the size of the practice will have a substantial influence on at least some of the partners' activities. Administrative duties, for examle, tend to increase exponentially with size, even for line artners, if for no other reason than attending partner meetings and evaluating staff.

While the nature of a law firm or accounting firm and the duties of the employee-owners may appear to be readily apparent, it is wise to spell out the specifics in both the employment contract and corporate minutes. Legal, accounting and architectural firms maintain records of hours worked and billed by each principal and staff person. Physicians maintain records of service provided by procedure code. Since these are accepted measurements for the amount of work performed they should be referenced in corporate documents. Administrative responsibilities can be quantified by the billing system of most professional practices and elaborated on in employment contracts. Other activities that are not directo producers of revenue, such as serving on professional society committees, belonging to social service organizations, attending social functions with existing and prospective clients, writing articles, etc., should be cited, or at least made available in the event of an audit.

Establishing the value of indirect revenue-producing activities is certainly more difficult than the hours worked/fees generated approach of billing. "Rainmakers" in law firms may do little actual billing, but generate substantial numbers of clients. Inexperienced revenue agents will have a difficult time correlating playing golf or having dinner with the generation of fee income. It is incumbent on the drafter of documents to cite activities in a fashion likely to enhance the productive aspects of such practices and minimize the pleasurable aspects. (Recall the earlier discussion of how the firm's compensation allocation system may highlight the value attached by the firm to the particular activities of its owners.)

Comparison of salaries paid with gross and net income: The courts will sometimes look at the percentage of gross and net income paid out in owner-employee compensation. In a professional practice, one might expect the percentage of net income before owner-employee compensation paid out as salary to be 100% in many instances. If more than 100% is paid out, a question will arise as to why the excess amount was not paid out in a prior year. This requires successfully arguing that past services were undercompensated (the last of the Mayson factors, discussed below).

A planning opportunity arises when owner-employee compensation results in a loss. Careful attention should be paid to documenting the compensation paid in the corporate minutes.

If substantial retained earnings (amounts in excess of the accumulated earnings credit of $150,000) are paid out as compensation, it is important to beware of the risk of an accumulated earnings tax problem as well as the reasonable compensation issue.

In the evaluation, the courts may also look at the percentage of gross receipts paid as compensation, much the same as any other operating expense. This percentage will be compared to prior years in an attempt to ascertain a pattern. Any peculiarity in the year(s) under examination will require explanation. The Mayson court made just such an analysis; a similar analysis was made in Owensby & Kritikos, Inc. (8)

A particularly favorable decision involving the reasonableness of paying a percentage of gross receipts as compensation was reached in McClung Hospital, Inc. (9) In its opinion on the reasonableness of the compensation paid to two physician/shareholders of the corporation, the court stated:

The fact that lames E. McClung and William D. McClung were paid on a more liberal basis than were other physicians who were junior to them and who occupied positions of lesser responsibility is not controlling. With respect to the fact that the two brothers together received their entire patient billings without reduction for expenses or uncollectible accounts we likewise do not consider to be controlling under the circumstances. (10) (Emphasis added.)

In January 1991, the Tax Court reported our Richlands Medical Association. (11) The case was heard by Judge Wells, who had been a private practice attorney specializing in PSCs before becoming a Tax Court judge. The three physicians involved in this case not only provided medical services but operated a local hospital. The court based allowed compensation on three elements: direct patient services, administrative functions at the hospital and duties as officers of the corporation.

As compensation for direct patient services, the court allowed 100% of the physician's collections, as contrasted with the 100% of billings in McClung. Reasonable compensation was determined for the responsibilities of the hospital departments and corporate officer positions. The court also cited the lack of dividends and a bylaw provision requiring net profits to be paid out as bonuses. This is an important case for several reasons, including the revival of the dividend issue and the fact that it was heard by a judge with significant expertise in the subject matter.

Prevailing general economic conditions: In Mayson, the IRS attempted to equate the company's extraordinary profitability with war-time production, rather than with any efforts of the owner-employees. In Owensby & Kritikos, the court stated: "There is no question that the remarkable growth and profitability of O & K . . . can be traced directly to Mr. Owensby and Mr. Kritikos. The Commissioner also concedes that capital was not a material income-producing factor for any of the corporations and that, although the economic climate was favorable during the years at issue, the success of the corporations was due mainly to the efforts of Mr. Owensby and Mr. Kritikos." (12) The court did go on to state, "Nonetheless, limits to reasonable compensation exist even for the most valuable employees."

The principle illustrated is that the taxpayer must demonstrate that the special skills of the owner-employees are responsible for the profits, which enable the payment of high compensation, rather than some particular attribute of the general economy. This seems less likely to be an issue for the professional corporation, unless some turn in the economy suddenly overvalues professional services.

Comparison of salaries with distributions: A typical component of the revenue agent's report is the taxpayer's dividend history (or lack thereof), along with the regulations under Secs. 301 and 316. This may seem unnecessary in the professional corporate setting, unless a distinction is made between corporate profit motive and owner-employee profit motive. The courts' evaluation of this factor (as well as the others) will tend to work against the professional corporation. It is also necessary to consider the importance of capital in larger practices. Capital is rewarded in most successful enterprises and a lack of such reward may indicate compensation is a disguised dividend. As noted earlier, the method of allocating compensation may support such an argument.

As professional corporations typically pay no dividends, a defense of this practice needs to be available. The most readily available defense would be to cite appreciation in the value of the capital as the source of return on investment. If the history of the firm's buy-ins and buy-outs indicates an increasing value on a per share basis, this might constitute a sound defense. If the cost of a buy-in or buy-out is nominal, this might also indicate the lack of importance of capital. Generally, one can expect to make a better case for deductible compensation if all profits are allocated based on factors specific to an individual's productivity (hours billed, procedures performed), client base, management services provided and similar items. Interest on capital accounts, payments consistent with stock ownership, and calculations of profitability of employees with stock ownership and of employees supervised might tend to undermine the compensation rationale. Each taxpayer's situation should be evaluated for exposure to a dividend argument.

Should a professional corporation pay a reasonable dividend each year? This can be a very painful practice since the Revenue Act of 1987's repeal of the graduated corporate rates for professional service corporations. A flat federal tax of 34%, coupled with applicable state income taxes, may result in a substantial tax burden. A practice that finds itself unable to allocate its compensation using noncapital factors would probably be well-advised to elect S status to avoid double traxation or the risk of same under audit. An analysis should indicate whether deductibility of health insurance and other "2% shareholder" fringe benefit items saves more than the cost of double taxation of dividends.

Note: State laws on S corporations must be evaluated as well. In Massachusetts, for example, no corporate level deduction is permitted for retirement plan contributions on behalf of shareholder-employees of electing S corporations. Partnerships, although undesirable for general legal liability reasons, offer a myriad of devices for allocating income and should not be ignored as a potential response.

As a general rule, paying more than a nominal dividend annually should be avoided through proper entity choice. If the above analysis indicates that regular corporate status remains desirable, it is incumbent on the corporation to measure its capital base, calculate a reasonable rate of return and pay a dividend. Caveat: Practitioners performing this analysis must bear in mind the danger of compensation payments that appear to match equity ownership.

Prevailing rates of compensation for comparable positions: This factor is fraught with risk. Expert witnesses are frequently used by both parties to prove the reasonableness of compensation by reference to similar situations. This comparison may not need to be made, however, if sufficient competent evidentiary matter is submitted in the particular situation under examination. Since professional practices can be unique in terms of profitability, this kind of comparison can be damaging. Thus, it is important to focus on individual efforts resulting in high compensation.

For physicians, Medical Economics publishes an annual survey by specialty and region containing salary information. The American Medical Association publishes Socioeconomic Characteristics of Medical Practice each year, which contains statistical data by specialty. Tax-exempt health care organizations are likely to come under increasing scrutiny as a result of IRS inquiry in general and legislation such as that introduced to require tax-exempt hospitals to return 75% of the value of their tax exemption to their community. The IRS has increased its review of those types of businesses operated in both the for-profit and not-for-profit sectors, looking for "inurement" in the form of excessive compensation. Such entities may find Report on Medical School Faculty Salaries, published by the Association of American Medical Colleges, useful for comparative data.

Salary policy as to all employees: In Rutter (13) and its companion case, Rutter Rex Manufacturing Co., Inc., (14) the court examined the salaries paid to each of the principal nonstockholder officer-employees as part of its evaluation of the payments to the father and son who owned and ran the business. In agreeing with the Tax Court on the limitation of the Rutters' compensation, the Appeals Court noted that "James Rutter still received 1.9 to 2.4 times the aggregate compensation of these five employees and Eugene Rutter received 1.4 to 1.7 times the aggregate compensation of these five employees." (15) (Emphasis supplied by the court.) It is easier to picture a similar comparison being applied to all of the partners in a professional practice than to staff persons. The Rutter court appeared to view the officers as a class for purposes of this particular analysis; hopefully, partners alone would constitute such a class. Nvertheless, the compensation allocation formula will be an important determinant of the outcome of such an analysis.

Compensation for prior services: In its opinion in R.J. Kremer Co., Inc., (16) the Tax Court stated, "As a general rule it is clear that a corporation may deduct as reasonable compensation payments made to an employee for both current and undercompensated past services." (17) The court went on to state that "(i)n order for a corporation to be entitled to a deduction for compensation payments made to an employee for undercompensated past services, it is necessary that the corporation establish both the amount of the undercompensation . . . and that current payments were intended as compensation for past services." (18) Taxpayers must meet both requirements of the test enunciated in Kremer: annual corporate minutes should provide for salary payments in excess of that actually paid and make specific reference to compensation for prior services for a particular year. In all cases, the taxpayer should demonstrate that those annual authorized payments are reasonable when compared to prevailing rates of compensation for comparable employees, generally regarded as the most significant of the Mayson factors.

Cash-basis taxpayers (as PSCs frequently are) do not typically prepare accrual statements, particularly in light of the TRA's corporate alternative minimum tax provisions; therefore, the liability for accrued but unpaid compensation measured by the difference between the amount paid and the amount authorized would not appear of ther than in the corporate minutes.

Other factors: Although it was not "listed" with the other Mayson factors, documentation of compensation is important even in the closely held corporate setting. Even though self-serving in many instances, such documents are often the only written evidence of what transpired and was intended. The Mayson court stated (in a sentence following the list of factors) that "[t]he action of the Board of Directors of a corporation in voting salaries for any given period is entitled to the presumption that such salaries are reasonable and proper." (19) In Kurzner, one of the long line of Kintner cases, the court stated, "The amount of the two professional employees' salaries is provided in their respective employment contracts; the amount of bonuses is determined by the board of directors but, in the past, bonuses have been made in accordance with the ratio of stock held by the employee." (20) (Emphasis added.) (There were two 50%, i.e., equal, shareholders in Kurzner.) This is indicative of the reliance the courts will place on legal documents such as employment contracts and appropriate corporate minutes.

Planning with the

Examining Agent in Mind

The decisions of the various courts provide sound guidance in determining which client records should be maintained. Every stockholder-employee should have an employment contract that specifies his responsibilities, compensation and incentive program, fringe benefits, vacation and continuing professional development time, and any other factors peculiar to the particular entity. Such contracts should be drafed at employment and reviewed annually to reflect current facts and circumstances.

The calculation of incentive or bonus programs that are based on formulas should be documented each year. It may be advisable to include this documentation with the annual minutes authorizing the payment of the incentives. If there are no defined quantitative criteria (which may be inadvisable), care should be taken to document in the minutes the particular factors influencing the award of a bonus to the individual. Contributions to pension and profit-sharing plans require appropriate corporate minutes in order to qualify the deductions in any event, this requirement can serve as the starting point for documenting other compensation issues. (In the author's practice, subject to client approval, the client's attorney is routinely notified of significant events that occur during the course of each year that may be desirable or necessary to include in the corporate minutes. This letter is prepared at the time the annual financial statements and income tax returns are prepared.)

Other factors often considered significant by the examining agent include (1) timing of the "distribution," such as year-end bonuses; (2) the source of funds to pay the distribution; (3) the presence of earnings and profits (E&P); and (4) how the distribution is reported on the tax returns of the corporation and the shareholder. (See the summary in Exhibit II, on page 184.)

Even in the unfortunate case in which a taxpayer/client has taken a "bonus" outside the normal payroll system, it should be possible to mitigate against this being prima facie evidence of a dividend. Regs. Secs. 31.3401(a)-1 through -4 state that the term "wages" means all remuneration for services performed by an employee. These regulations specifically state that the name by which remuneration is designated and the medium in which it is paid is "immaterial" in determining whether the remuneration is wages. Of course, the possibility exists that the IRS would attempt to assert the 100% penalty for failure to withhold, but the Internal Revenue Manual indicates this penalty will be used only when the tax has not and cannot be collected from the individual receiving the income. (21)

A corporation may well have E&P at the time the payment is made in a lump sum, but this factor alone does not justify the recharacterization of compensation as a dividend. It does, however, raise the specter of what may be regarded as the flip side of an unreasonable compensation case: the accumulated earnings tax. (22)

(In the event that a practitioner fails to win the issue in the Examination Division, Exhibit III above provides information on preparing an Appeals Protest.)

Recent Legislative Developments

Current tax law requires PSCs to make minimum distributions when a Sec. 444 election is in effect. Although no such election may be in effect, the requirements of Sec. 280H indicate that clearly stated congressional intent is to force PSCs to distribute most, if not all, of their net income as compensation. Sec. 280H(c) requires a compensation distribution of (at most) 95% of adjusted taxable income for the deferral period of a tax year in order to meet the minimum distribution requirement. Further, the House Report on the changes in Sec. 11--to deny graduated corporate rates to PSCs--simply stated that "[t]he personal service income of corporations owned by its employees is taxed to the employee-owners at the individual graduated rates as it is paid out in salary." (23) (Emphasis added.) The House Ways and Means Committee apparently had no expectation that a PSC would retain any income, but would pay it all out as compensation.

Another potential issue may arise if a practice is terminating or winding down. Receivables in an established practice may run from 90 to 120 days or more. (This could be of particular note in certain surgical practices, such as obstetrics, where bills are often not issued until the baby is delivered.) Since the taxpayer is reporting on the cash basis, the balance sheet at a given point in time would not reflect the accrued liability for services provided but not yet paid, in addition to not reflecting fee income not yet collected (accounts receivable). The process of collecting fees and paying expenses generally continues for a significant period of time after services cease to be currently provided. Congress acknowledged this fact in the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) (24) when it provided for built-in deduction items as offsets to built-in gain items.

As an example of these built-in gain and loss provisions, in the case of a cash basis personal service corporation that converts to S status and that has receivables at the time of the conversion, the receivables, when received, are built-in gain items. At the same time, built-in losses would include otherwise deductible compensation paid after the conversion to the persons who performed the services that produced the receivables, to the extent such compensation is attributable to such pre-conversion services. (25) (Emphasis added.)

Any attempt to analyze the timing of the payment of compensation would have to allow for this timing difference due to the peculiarities of this type of cash-basis taxpayer. Moreover, a soundly managed corporation would scarcely pay a dividend until it has satisfied its obligations for unpaid expenses.

Conclusion

The IRS has traditionally stayed out of the reasonable compensation area in professional corporations. Such corporations have changed, however, becoming increasingly larger and taking on characteristics common to other businesses. Methods of allocating profits in the corporation may lend credence to the traditional Service argument that invested capital is being rewarded, even though the distributions are characterized as salary. Since professional corporations will likely have no dividend history, the Service's hand will be further strengthened. Practices in which substantial buyins are required should pay particular attention to documenting compensatory motives in their corporate minutes. The small defined benefit plan audit program will bring before the Service a number of professional corporations, subjecting such corporations as a class to the risk of a review of their compensation practices.

[1] Jerome Mirza and Associates, Ltd., 888 F2d 229 (7th Cir. 1989)(64 AFTR2d 89-5233, 89-2 USTC P (492), aff'g 692 F Supp 918 (c.D. Ill, 1988)(62 AFTR2d 88-5485 88-2 USTC P9505).

[2] See Bayer and Price, "IRS Small Pensio. Plan Audit (and Amnesty) Program," 23 The Tax Adviser 78 Feb. 1992).

[3] Arthur R. Kintner, 216 F2d 418 (9th Cir. 1954)(46 AFTR 995, 54-2 USTC P9626).

[4] Educardo Catalano, Inc., Pension Trust, TC Memo 1979-183, at 79-728.

[5] Sec. e.g., Braden, "Who Gets the Biggest Slice? A Model for Dividing the Pie," 14 The Practicing CPA 3 (Sept. 1990).

[6] James H. Rutter, 853 F2d 1267 (5th Cir. 1988)(62 AFTR2d 88-5594 88-2 USTC [paragraph]9500), aff'g TC Memo 1986-407.

[7] Mayson Manufacturing Co., 178 F2d 115 (6th Cir. 1949)(38 AFTR 1028, 49-2 USTC [paragraph]9467), rem'g TC Memo 1948-242.

[8] Owensby & Kritikos, Inc., 819 F2d 1315 (5th Cir. 1987)(60 AFTR2d 87-5224, 87-2 USTC [paragraph]9390), aff'g TC Memo 1985-267.

[9] McClung Hospital, Inc., TC Memo 1960-86.

[10] Id., at 60-508.

[11] Richlands Medical Association, TC Memo 1990-660.

[12] owensby & Kritikos, note 8, 5th Cir., at 87-2 USTC 89,062.

[13] Rutter, note 6.

[14] J. H. Rutter Rex Manufacturing Co., Inc., 853 F2d 1275 (5th Cir. 1988)(62 AFTR2d 88-5600, 88-2 USTC [paragraph]9499), aff'g, rev'g and rem'g TC Memo 1987-296.

[15] Rutter, note 6, 5th Cir., at 88-2 USTC 85,403.

[16] R. J. Kremer Co., Inc., TC Memo 1980-69.

[17] Id., at 80-397, citing the rule of Lucas v. Ox Fibre Brush Co., 281 US 115 (1930)(8 AFTR 10901, 2 USTC [paragraph]522).

[18] Kremer Co., note 16, at 80-397.

[19] Mayson Manufacturing co., note 7, 6h Cir., at 49-2 USTC 13,298.

[20] Howard A. Kurzner, 286 F Supp 839 (S.D. Fla. 1968) (22 AFTR2d 5197, 68-2 USTC [paragraph]9514), aff'd, 413 F2d 97 (5th Cir. 1969)(23 AFTR2d 691482, 69-1 USTC [paragraph]9428); 5th Cir., at 69-1 USTC 84,766.

[21] IRM 57(16)0 731.

[22] See the Rutter cases, notes 6 and 14, in which the interplay between reasonable compensation and the accumulated earnings tax was examined.

[23] House Ways and Means Committee Report on Revenue Bill of 1987, at 1097.

[24] TAMRA Section 1006(f)(5)(A), amending Sec. 1374(d).

[25] H. Rep. No. 100-795, 100th Cong., 2d Sess. 63-64 (1988).