Suppose you are a CPA hired to represent a client who is currently under examination by the IRS. The client is the president and 95% shareholder of a building supply sales and warehousing business. He also owns 50% of the stock of a construction company. The clients son owns the remaining 50% of the construction company's stock. The client has received a notice of proposed adjustments (NPA) on three significant issues related to the building supply business for the years under examination.

The issues identified in the NPA are unreasonable compensation, stock redemptions, and a rental loss. Additional facts regarding the issues are reflected below:

• Stock redemptions: During the audit period, the construction company redeemed 50% of the outstanding stock owned by the client and 50% of the stock owned by the clients son, leaving each with the same ownership percentage of 50%.
• The IRS treated the redemption as a distribution under IRC Section 301.

1. Determine reasonable versus unreasonable compensation as outlined in the IRS 162(a) law.