Clary Hood, Inc. v. Commissioner – Tax Court provides guidance on determining reasonable compensation

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Abstract: The issue of reasonable compensation frequently comes up when valuing a business. In Clary Hood, Inc. v. Commissioner, the U.S. Tax Court provided valuable guidance on the determination of reasonable compensation as well as the sufficiency of expert testimony on the subject. This article explores the court’s decision, which not only addresses a federal tax issue, but also clarifies how to determine reasonable compensation in other contexts, such as shareholder disputes and divorce matters. T.C. Memo 2022-15, affirmed in part and vacated in part (with respect to penalties), Clary Hood, Inc. v. Commissioner, 69 F.4th 168 (4th Cir. 2023).