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Business Associations Keyed to Epstein, 5th Ed.
Exacto Spring Corporation v. Commissioner
Citation:
196 F.3d 833 (1999)Facts
Exacto Spring Corporation, a manufacturer of precision springs, paid its co-founder, CEO, and 55% owner William Heitz $1.3 million in 1993 and $1.0 million in 1994. Heitz was not only the CEO but also the company’s chief salesman, marketing executive, head of research and development, and principal inventor. The IRS determined that reasonable compensation would have been $381,000 in 1993 and $400,000 in 1994, with the excess amounts constituting disguised dividends that were not deductible. The Tax Court, applying a seven-factor test, concluded that reasonable compensation would have been $900,000 in 1993 and $700,000 in 1994. The court reached this conclusion despite finding that Heitz was “indispensable” to Exacto’s success, possessed unique skills in a specialized field, was highly qualified, and provided valuable services to the corporation. Additionally, Exacto’s other major shareholders (each owning 20% of the company) had approved Heitz’s compensation.
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