Common use of Treatment of excessive compensa- tion Clause in Contracts

Treatment of excessive compensa- tion. (i) S, a corporation, has two equal shareholders, C and D, who are each em- ployed by S and have binding employment agreements with S. The compensation paid by S to C under C’s employment agreement is reasonable. The compensation paid by S to D under D’s employment agreement, how- ever, is found to be excessive. The facts and circumstances do not reflect that a principal purpose to D’s employment agreement is to circumvent the one class of stock require- ment of section 1361(b)(1)(D) and this para- graph (l). (ii) Under paragraph (l)(2)(i) of this section, the employment agreements are not gov- erning provisions. Accordingly, S is not treated as having more than one class of stock by reason of the employment agree- ments, even though S is not allowed a deduc- tion for the excessive compensation paid to D.