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related entities that include a partnership, Velvet Horn, Inc. v.
Commissioner, T.C. Memo. 1981-227 (rental payments from
controlled corporation to controlled partnership). To be
deductible under section 162(a)(1), compensation must be both:
(1) Reasonable and (2) paid "purely for services" rendered to the
business. Sec. 1.162-7(a), Income Tax Regs.
According to section 1.162-7(a), Income Tax Regs., any
amount paid in the form of compensation, but not in fact as the
purchase price of services, is not deductible. Sec. 1.162-
7(b)(1), Income Tax Regs. In addition, contingent compensation
invites close scrutiny as a possible distribution of earnings of
the enterprise. Sec. 1.162-7(b)(2), Income Tax Regs. If a
contingent compensation arrangement turns out to generate
payments greater than the amounts that would ordinarily be paid
as compensation, those payments are generally deductible only if
they are paid pursuant to a free bargain between the employer and
the individual made before the services are rendered and not
influenced by any consideration on the part of the employer other
than that of securing the services of the individual on fair and
advantageous terms. Id. Finally, the allowance for the
compensation may not exceed what is reasonable under all the
circumstances. Sec. 1.162-7(b)(3), Income Tax Regs.
Bonuses paid to employees are deductible only when made in
good faith and as additional compensation for services actually
rendered by the employees, provided that when added to the
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