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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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Last modified: May 25, 2011