Lumber City Corporation, f.k.a. Neiman-Reed Lumber and Supply Company, Inc. - Page 23

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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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