Unreasonable Compensation Expert Witness Services
We have assisted both the IRS and tax payers in tax litigation to determine whether employee/owners in closely held businesses are reasonably compensated. We have assisted in dissident shareholder disputes involving the reasonableness of compensation for employee stockholders.
Our task in these cases is generally to show whether the employee/owner was reasonably compensated for his/her services paid similarily in an arms length transaction at the level that he/she was actually compensated for the years in question. The reasonableness of compensation is determined by a number of factors which we research and analyze including the following:
- Employee/owner’s role in the company including duties and hours worked. This involves reviewing job descriptions, possible interviews with the job incumbent, review of time records when available, review of deposition transcripts when relevant information is available and comparison to typical duties assigned to someone in a similar position in other organizations of similar type and size.
- Competitive pay practices in the industry for similar job responsibilities and similar performance in companies of similar size and geographic location. This includes viewing not only the compensation for the years in question, but also for prior years to determine whether the compensation is impacted by over compensation or under compensation in prior years.
- Character and condition of the company. Comparison of company financial performance and shareholder return to industry norms. This usually requires researching and obtaining published data on the industry through any or all of the following: financial statement studies, SEC documents, industry studies conducted by associations, trade magazines, or consultants, and/or interviews with industry experts. We then examine the tax payer organization’s historical financial statements (usually including years prior to the year(s) in question) and provide a comparative analysis.
- Potential conflict of interest in regards to whether a relationship exists between the taxpaying company and its employee which might permit the company to disguise nondeductible corporate distributions of income as salary.
- Internal consistency in pay practice with prior practice of the organization in regards to salary and bonus programs/practices historically in place within the organization as well as consistency with overall pay practices of the organization.
- Impact of prior trial court findings on reasonable compensation analysis. Attorneys generally provide us with copies of recent and important cases which may impact the case at hand. We review and use this information to tailor our report.
As experts in compensation matters of all kinds and as publishers of one of the best known books on employee pay and benefits surveys, we are particularly qualified to provide assistance with unreasonable compensation cases. All case direction and court testimony is provided by Mae Lon Ding, who has testified as an expert in court cases involving employee compensation and performance issues since 1989. Ms. Ding is a founding member and former board director of the Orange County Forensic Consultant’s Association.