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satisfication of any amounts due him for consulting and advisory
services,” and that “the amount has been acknowledged by the
authorized representative of the shareholders to be consistent
with the agreements and understandings previously made and
entered into.” Hagerman approved the resolution on July 30,
1991. The payment represented 3.3 percent of petitioner’s
cumulative gross receipts since 1985.
Mohney received a Form 1099 reflecting the payment and
included it in income for 1991 as gross receipts from his
consulting business. Petitioner deducted the payment in
computing its taxable income for the taxable year ended August
31, 1991 (TYE 8/31/91). In her notice of deficiency respondent
disallowed the full deduction.
Discussion
The first issue raised by petitioner’s payment to Mohney of
$274,980 in TYE 8/31/91 is whether it may be deducted as
compensation. If so, we must decide for what taxable year(s) it
is deductible. Section 162(a)(1) provides that deductible
business expenses include a reasonable allowance for salaries or
other compensation for personal services actually rendered. In
general the deductibility of a payment characterized as
compensation turns on two requirements: The payment must be
purely for services, and it must be reasonable in amount.
Elliotts, Inc. v. Commissioner, 716 F.2d 1241, 1243-1244 (9th
Cir. 1983), revg. T.C. Memo. 1980-282; sec. 1.162-7(a), Income
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