33
like circumstances. Sec. 1.162-7(b)(3), Income Tax Regs. Where
there is no free bargain between the parties as contemplated by
section 1.162-7(b)(2), Income Tax Regs., a contingent
compensation agreement will not be dispositive of what is
deductible under section 162(a)(1). Pepsi-Cola Bottling Co. v.
Commissioner, 528 F.2d 176, 181-183 (10th Cir. 1975), affg. 61
T.C. 564 (1974); Hammond Lead Prods., Inc. v. Commissioner, 425
F.2d 31, 33 (7th Cir. 1970), affg. T.C. Memo. 1969-14. The court
in such a case is free to make its own determination of what is
reasonable compensation.
Whether an expenditure that is claimed as a deduction under
section 162(a)(1) is reasonable compensation for services
rendered is a question of fact that must be decided on the basis
of the facts and circumstances. Estate of Wallace v.
Commissioner, 95 T.C. 525, 553 (1990), affd. 965 F.2d 1038 (11th
Cir. 1992); Paula Constr. Co. v. Commissioner, 58 T.C. 1055,
1058-1059 (1972), affd. without published opinion 474 F.2d 1345
(5th Cir. 1973). The burden is on petitioners to show that they
are entitled to a compensation deduction larger than that allowed
by respondent. Rule 142(a); Owensby & Kritikos, Inc. v.
Commissioner, supra at 1324; Nor-Cal Adjusters v. Commissioner,
503 F.2d 359, 361 (9th Cir. 1974), affg. T.C. Memo. 1971-200.
Partnerships bear this burden as much as corporations. Huber v.
Commissioner, T.C. Memo. 1984-593.
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