James H. Leste and Stacy Leste, et al. - Page 12

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                                       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.                                                                       
               Petitioners contend that the payments to Silbernagel represent         
          compensation for services rendered and for his agreement not to             
          compete with FAMC.  Respondent claims that the payments were, in            
          substance, additional payments by Leste and Moore for the stock in          
          FAMC.  Respondent contends that FAMC is not entitled to deduct the          
          payments under section 162(a)(1) because Silbernagel performed few          
          or no consulting services for FAMC, and that such payments                  
          constitute constructive dividends to Leste and Moore to the extent          
          of FAMC's earnings and profits.4  Apschnikat v. United States, 421          
          F.2d 910, 913 (6th Cir. 1970); Smith v. Commissioner, 70 T.C. 651,          
          668 (1978).                                                                 
               Petitioners provided little documentation of the work                  
          performed by Silbernagel on behalf of FAMC.  We are mindful,                
          however, that the consulting and noncompetition agreement entered           
          between FAMC and Silbernagel provided for fixed monthly payments to         

               4    The parties agree that FAMC had sufficient earnings and           
          profits in all relevant years such that all of the payments to              
          Silbernagel would be eligible for treatment as constructive                 
          dividends.                                                                  


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