- 84 -
amounts are not deductible under section 162(a) because the
payments represented a distribution of profits.
Section 162(a) allows deductions for all “ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business”. Management expenses are
among the items included in business expenses. Sec. 1.162-1,
Income Tax Regs. The test of deductibility of payments made for
services, whether compensation or management, is whether the
payments are reasonable and are in fact payments purely for
services. Achiro v. Commissioner, 77 T.C. 881, 903 (1981); sec.
1.162-7(a), Income Tax Regs. A bona fide contract for management
services may be a factor in establishing deductibility. Achiro
v. Commissioner, supra. Whether an expense that is claimed
pursuant to section 162(a) is compensation for services rather
than a distribution of profits is a question of fact that must be
decided on the basis of the particular facts and circumstances.
Paula Constr. Co. v. Commissioner, 58 T.C. 1055, 1058-1059
(1972), affd. without published opinion 474 F.2d 1345 (5th Cir.
1973). If the corporation is closely held and the persons
receiving the payments are shareholders, the payments are subject
to close scrutiny to determine whether the alleged compensation
is in fact a distribution of profits. Elliots, Inc. v.
Commissioner, 716 F.2d 1241, 1243 (9th Cir. 1983), revg. and
remanding on other grounds T.C. Memo. 1980-282. Management fees
paid to related parties in excess of reasonable arm's-length fees
Page: Previous 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 NextLast modified: May 25, 2011