- 11 -
We do not find the absence of such documentation to be
dispositive. The fact that petitioner’s books do not reflect the
accrual of a liability at the time services were rendered is not
necessarily inconsistent with an understanding that the company
was obligated to pay for the services. The amount and timing of
the payment were understood to be contingent on business
performance over an indefinite period. To have made a reasonable
estimate of the accrued expense for Mohney’s compensation in the
company’s accounts would have been extremely difficult under
these circumstances. Assuming that a business relationship did
exist between petitioner and Mohney, plainly it would not have
been conducted at arm’s length, and therefore, in general,
documentation of the kind sought by respondent would have served
little, if any, useful function. Where the owner of a closely
held corporation takes an active part in managing its business,
neglect of formal documentation of the compensation arrangement
between them is not uncommon. In recognition of this fact, our
cases have not required formal documentation as a condition for
deductibility of executive compensation in the context of a
closely held corporation. Levenson & Klein, Inc. v.
Commissioner, 67 T.C. 694, 713-714 (1977); Reub Isaacs & Co. v.
Commissioner, 1 B.T.A. 45, 48 (1924); Pulsar Components Intl.,
Inc. v. Commissioner, T.C. Memo. 1996-129; Mad Auto Wrecking, Inc
v. Commissioner, T.C. Memo. 1995-153.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011