The Tax Advisor: “S corporation shareholders [and owners of LLCs taxed as S corporations] generally prefer dividend distributions of their S corporations’ [or LLC’s] profits over compensation payments from the S corporations [LLCs] because the compensation payments are subject to payroll taxes and dividend distributions are not. To prevent S corporations and their shareholders from avoiding payroll taxes by maximizing distributions and minimizing compensation payments, the IRS requires S corporations to pay shareholders who provide substantial services reasonable compensation. Disputes between the IRS and taxpayers have required courts to determine on a regular basis whether an S corporation has paid reasonable compensation to its shareholder(s).