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dividends for petitioner. For the years 1986 through 1990,
petitioner's retained earnings were as follows:
Year Retained Earnings
1986 $96,623
1987 247,338
1988 649,000
1989 1,707,137
1990 3,388,705
G. Petitioner's Audits
On December 4, 1990, petitioner received a notice of audit
for 1989 (the 1989 audit). The 1989 audit continued until
December 4, 1992. During the 1989 audit of petitioner, the
Internal Revenue Service (IRS) analyzed the issue of the
deductibility of compensation paid to Rogers and obtained
information relating to the calculation of compensation in both
1989 and 1990, including the amount of compensation petitioner
paid Rogers, and petitioner's 1990 tax return. Petitioner paid
Rogers $928,883 of compensation in 1989 and $4,439,180 in 1990.
Respondent allowed $400,000 as a deduction for reasonable
compensation.
OPINION
Issue 1. Whether the Amount Paid by Petitioner to Rogers as
Compensation During Taxable Year 1990 Is Reasonable Within the
Meaning of Section 162(a)(1)
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". To come
within the ambit of section 162(a)(1), the compensation must be
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