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Exacto Spring Corporation v. Commissioner

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Bloomberg Law

Citation. 196 F.3d 833, 1999 U.S. App. 99-2 U.S. Tax Cas. (CCH) P50,964; 84 A.F.T.R.2d (RIA) 6977

Brief Fact Summary. William Heitz was the cofounder, chief executive officer, and principal owner of the Exacto Spring Corporation. The corporation paid him $1.3 million and $1.0 million for tax years 1993 and 1994 as compensation. The corporation sought to deduct this from its income.

Synopsis of Rule of Law. A business may deduct from its income ordinary and necessary business expenses including a reasonable allowance for salaries or other compensation for personal services.

Facts. William Heitz was cofounder, chief executive officer, and principal owner of Exacto Spring Corporation. He was paid $1.3 million and $1.0 million in salary in 1993 and 1994. The IRS found this excessive and thought he should not have been paid more than $381,000 in 1993 or $400,000 in 1994. The difference was added to the corporation’s income and a deficiency assessed. The Tax Court found that the maximum reasonable compensation should have been $900,000 and $700,000.

Issue. Was the salary paid to Heitz excessive and should the excess be included on the corporation’s income?

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