H & A International Jewelry, Ltd. - Page 11

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               Petitioner deducted Mr. Haviv's salary for 1991 and 1992 as            
          a business expense.  This produced a loss of $132,278 for 1992              
          which was carried back to offset income from 1989, 1990, and                
          1991.                                                                       


          Discussion                                                                  
               The sole issue for determination is whether the salary and             
          bonus paid by petitioner to its president, Haim Haviv, in 1991              
          and 1992 represents reasonable compensation deductible as a                 
          business expense.  Petitioner contends that the entire                      
          compensation paid, $601,077 in 1991 and $603,269 in 1992, was               
          reasonable and paid for his present and past services.                      
          Respondent, on the other hand, determined that reasonable                   
          compensation for Mr. Haviv was $207,852 and $224,313 for 1991 and           
          1992, respectively.                                                         
               Section 162(a)(1) allows a deduction for ordinary and                  
          necessary business expenses including "a reasonable allowance for           
          salaries or other compensation for personal services actually               
          rendered".  Compensation which is a guise for the distribution of           
          dividends to employee-stockholders is not deductible.  Sec.                 
          1.162-7(b)(1), Income Tax Regs.  Respondent's determination is              
          presumed correct, and petitioner has the burden of proving that             
          the amount it paid to Mr. Haviv was reasonable.  Rule 142(a);               
          Welch v. Helvering, 290 U.S. 111, 115 (1933).  If petitioner                






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