Also known as: reasonable salary · reasonable compensation
Written by attorneys — see sources below.
Compensation paid to an employee or service provider that qualifies as an ordinary and necessary business expense or allowable payment when it reflects the fair value of services rendered.
Riley Rivera sued a third party after a tort by Rhapsody Entertainment forced her to defend her interests in a prior action. The court awarded her reasonable compensation covering loss of time and attorney fees incurred in that earlier proceeding. The award treated the fees as reasonable salaries equivalent for the protective litigation services she had to secure.
Ravi Reddy and Ruby Rivera formed a partnership with no agreement for salaries. After dissolution Ravi performed services winding up the business. The court allowed him reasonable compensation for those winding-up services but denied any pay for earlier partnership work.
Rowan Russell served as personal representative of an estate under a will that set a fixed fee. Before qualifying Rowan filed a written renunciation and later sought reasonable compensation for services actually rendered. The court granted the request because the renunciation allowed recovery of reasonable compensation instead of the will amount.
Raymond Ramos and Roberto Reyes owned a closely held C corporation. They paid themselves salaries calibrated to market rates for their management roles. The IRS accepted the salaries as reasonable and deductible ordinary expenses rather than recharacterizing them as nondeductible dividends.
Rhapsody Entertainment paid its controlling shareholder a large salary while minority owners received only dividends. The minority owners claimed the salary exceeded reasonable compensation and functioned as a disguised distribution. The court examined whether the amount fairly matched the services performed.
Riverfront Developments received public funds for a project and paid salaries to its managers. Opponents argued the salaries were excessive and not reasonable compensation for the work done. The court reviewed the salaries to determine whether they reflected fair value for services in the project context.
Partners receive reasonable compensation only for services rendered in winding up the partnership business. During ordinary operations partners are expected to contribute services in exchange for their share of profits rather than a salary.
Courts compare the salaries to market rates for similar services and consider whether the payments serve legitimate business purposes such as avoiding double taxation. Salaries that exceed fair value for the work performed may be recharacterized as nondeductible dividends.
Yes. A personal representative may renounce the will's compensation clause before qualifying and then receive reasonable compensation for services actually rendered. A written renunciation filed with the court preserves this right.
…See Stratis v. Andreson , 254 Mass. 536 (1926); Sagalyn v. Meekins, Packard & Wheat, Inc. , 290 Mass. 434 (1935). What is “reasonable compensation” is a question of fact. Black v. Parker Mfg. Co. , 329 Mass. 105, 116 (1952). The proof which establishes an excess over such “reasonable compensation” appears easier than the proof which…