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OPINION18
Section 162(a)(1) allows a corporation to deduct as a
business expense "a reasonable allowance for salaries or other
compensation for personal services actually rendered". A corpor-
ation may be entitled to deduct compensation for the year during
which such compensation is paid to an employee, even though the
employee performed the services for which he or she is being
compensated in a prior year. Lucas v. Ox Fibre Brush Co., 281
U.S. 115, 119 (1930). To be deductible, however, the corporation
must show: (1) That the corporation intended to compensate the
employee for past undercompensation and (2) the amount of the
past undercompensation. Pacific Grains, Inc. v. Commissioner,
399 F.2d 603, 606 (9th Cir. 1968), affg. T.C. Memo. 1967-7;
Estate of Wallace v. Commissioner, 95 T.C. 525, 553-554 (1990),
affd. 965 F.2d 1038 (11th Cir. 1992).
Section 1.162-7(a), Income Tax Regs., establishes "a two-
prong test for deductibility under section 162(a)(1): (1) the
amount of the compensation must be reasonable and (2) the pay-
ments must in fact be purely for services." Elliotts, Inc. v.
Commissioner, 716 F.2d 1241, 1243 (9th Cir. 1983), revg. and
18 We have considered all of the arguments made by the parties
and, to the extent not discussed herein, have found them to be
without merit.
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