-15-
Notice of Deficiency
Respondent determined in the notice of deficiency that only
$135,207 of the $1,777,800 compensation (bonus and wages) that
petitioner paid Mr. Leonard in 1987 was reasonable. Accordingly,
the notice of deficiency disallows the remainder of petitioner's
claimed deduction for Mr. Leonard's compensation.
OPINION
Section 162(a)(1) permits a corporation to deduct “a reasonable
allowance for salaries or other compensation for personal services
actually rendered” as an ordinary and necessary business expense.
Compensation payments are deductible under section 162(a)(1) if they
are reasonable, and paid “purely for services” rendered to the
business. Sec. 1.162-7(a), Income Tax Regs. More specifically,
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 salaries, they do
not exceed reasonable compensation for the services rendered.
Rapco, Inc. v. Commissioner, T.C. Memo. 1995-128, affd. 85 F.3d 950
(2d Cir. 1996); sec. 1.162-9, Income Tax Regs. Courts generally
focus on the reasonableness requirement. Elliotts, Inc. v.
Commissioner, 716 F.2d 1241, 1243 (9th Cir. 1983), revg. and
remanding T.C. Memo. 1980-282.
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