Leonard Pipeline Contractors, Ltd. - Page 15

                                                  -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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