Testing For Disguised Dividends In Compensation For Employee-Shareholder Of Closely Held Corporations: An Analysis Of Federal Court Testing Regimes and Their Impact On The Predictability of Outcomes

Authors

Matthew Edward Lewis

Abstract

The Internal Revenue Code generally allows for a corporation to deduct compensation paid to its employees. However, in a closely held corporation, where an employee is also a controlling shareholder, compensation paid to the employee-shareholder may be characterized as nondeductible dividends. This paper analyzes the major testing regimes used by the federal circuit courts to test for nondeductible dividends in compensation paid to employee-shareholders of closely held corporations. Further, this paper analyzes whether any of the federal testing regimes provide for more predictable outcomes to both the Internal Revenue Service and taxpayers. Finally, this paper explores whether new regulations would assist corporate taxpayers in the structuring of executive compensation plans for its employee-shareholders, as well as the impact of recent changes to the Internal Revenue Code.

First Page

1

Recommended Citation

Matthew E. Lewis, Testing For Disguised Dividends In Compensation For Employee-Shareholder Of Closely Held Corporations: An Analysis Of Federal Court Testing Regimes and Their Impact On The Predictability of Outcomes, 7 Bus. Entrepreneurship & Tax L. Rev. 1 (2024).
Available at: https://scholarship.law.missouri.edu/betr/vol7/iss1/3