Over the years, there have been various IRS revenue rulings and court cases involving reasonable compensation. Find details about many of these precedents below.

IRS Revenue Ruling 74-44 – Dividends (dividends in this context means distributions) that two sole shareholders of an electing small business corporation arranged to receive instead of reasonable compensation in the same amounts for services they performed constituted “wages” for which the corporation was liable for the taxes imposed by the FICA and the FUTA and the withholding of income tax.

Spicer Accounting v. United States, 918 F.2d 90 – 66AFTR 2nd 90-5806 (1990) – Taxpayer accounting corporation sought a refund for FICA and FUTA taxes paid to the IRS on behalf of Mr. Spicer. Taxpayer contends that payments paid to Mr. Spicer were dividends, since payments made to stockholders in a subchapter S corporation are not wages. The court found that because payments received by Mr. Spicer were for substantial services rendered, these payments are "wages" subject to FICA and FUTA. Taxpayer asserts, in the alternative, that it was not liable for FICA and FUTA because Mr. Spicer was an independent contractor, not an employee. The Court denied Taxpayer's claim finding that there is no evidence that Mr. Spicer was an independent contractor. Finally, the Court held that Sec. 530 of the Revenue Act of 1978 does not relieve Taxpayer from FICA and FUTA liability for the years at issue (1981 and 1982), because Taxpayer's treatment of Mr. Spicer as a stockholder, not as an employee, was unreasonable. Therefore, the Court affirmed the district court's decision.

Watson v. U.S. 107 AFTR 2nd 2011-311 (DC IA) 12/23/2010 - The IRS recharacterized dividend and loan payments from David E. Watson, P.C. to its sole shareholder and employee, David E. Watson, as wages. In light of this recharacterization, Watson was assessed additional employment taxes, interest and penalties for each of the eight calendar quarters in 2002 and 2003. He paid the fourth quarter 2002 assessment of $4,063.93 and filed a claim for refund of that amount on or about June 27, 2007 and the IRS subsequently denied his request for a refund.

Watson filed an action contending that the assessments were illegal and requesting a refund of the amount paid. The IRS filed an Answer and Counterclaim resisting Watson's request for refund and requesting Judgment against Watson in the amount of $44,457.39 for additional assessments, penalties, and interest for the seven additional quarters in 2002 and 2003 for which Watson did not make payment. Although Watson received a minor adjustment in the amount owed, the IRS prevailed.

California conforms to federal treatment of reasonable compensation (but California does not conform to the Sec 199A deduction).