E.J. Harrison & Sons, Inc. v. Commissioner

MEMORANDUM **

E.J. Harrison & Sons, Inc. (“Taxpayer” or “corporation”), appeals a decision by the Tax Court finding that in 1995, 1996, and 1997, most of the salary paid to Taxpayer’s primary shareholder, Mrs. Harrison, constituted unreasonable compensation and therefore was not deductible by Taxpayer as an “ordinary and necessary” business expense under Internal Revenue Code § 162(a)(1). The Tax Court conducted its own determination of reasonable compensation pursuant to the Ninth Circuit’s five-factor test articulated in Elliotts, Inc. v. CIR, 716 F.2d 1241 (9th Cir.1983). It concluded that Mrs. Harrison’s role in the corporation was equivalent to that of an outside board chair and set reasonable compensation at roughly $100,000 for each audit year.

We affirm the Tax Court’s application of the Elliotts test and its determination that a portion of Mrs. Harrison’s salary should be disallowed as unreasonable compensa *996 tion. However, we reverse the Tax Court’s finding that Mrs. Harrison’s role in the corporation was “secondary” and equivalent to that of a typical outside board chair. The undisputed evidence indicated that during the audit years, Mrs. Harrison personally…