When the IRS challenges the reasonableness of compensation, the dispute runs in one of two directions. In C-corporations, the Service argues owner pay is excessive — deductible salary disguising nondeductible dividends. In S-corporations, the argument reverses: salary set too low, converting wages into distributions to avoid employment taxes. Grahall provides independent analysis and expert testimony on both sides of that line, under IRC §162 and the case law built on it.
When counsel retain us
We are engaged at every stage of a tax controversy: supporting a position before the return is filed, responding during examination, presenting analysis in Appeals, and providing expert reports and testimony in Tax Court and refund litigation. The earlier the engagement, the more options the analysis preserves.
How the opinion is built
A defensible number rests on convergent methods: market pricing against credible third-party survey data, a composite analysis of the roles the owner actually performs, and the independent investor test asking whether the return left to equity justifies the pay. Where the matter calls for it, we apply the multifactor framework of Elliotts, Inc. v. Commissioner, and every step is documented so the path from evidence to conclusion is auditable — because in an audit, the documentation largely is the opinion. Our guide to reasonable compensation reports covers what that documentation contains.
If this question is live in a matter you are handling, request a conflicts check — an initial conversation costs nothing and quickly clarifies whether an independent compensation expert strengthens your case. Our methodology and engagement structures pages explain how we work.
Owner and shareholder-employee matters: for the S corporation side of §162 — insufficient compensation and distribution reclassification — see our S corporation reasonable compensation practice, our commentary on Clary Hood and Watson, and our pre-filing opinion letters for documenting compensation before it is challenged.