O.S.C. & Associates, Inc. d.b.a. Olympic Screen Crafts - Page 7

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          1990 deduction, $1,580,631 of petitioner's 1991 deduction, and              
          $1,198,677 of petitioner's 1992 deduction.  The petition in this            
          case was filed on March 6, 1995.                                            
          I.  Deductibility of Plan Payments                                          
               Section 162(a) provides that a taxpayer may deduct all                 
          "ordinary and necessary expenses paid or incurred during the                
          taxable year in carrying on any trade or business".  Such                   
          expenses may include "a reasonable allowance for salaries or                
          other compensation for personal services actually rendered".                
          Sec. 162(a)(1); sec. 1.162-7(a), Income Tax Regs.  For such an              
          expense to be deductible, two elements must be present:  (1) The            
          amount must be reasonable, and (2) the expense must relate to               
          compensation for services actually rendered.  Elliotts, Inc. v.             
          Commissioner, 716 F.2d 1241, 1243 (9th Cir. 1983), revg. T.C.               
          Memo. 1980-282.  Where there is evidence that an otherwise                  
          reasonable compensation payment contains a disguised dividend, we           
          may expand our inquiry into the existence or nonexistence of                
          compensatory intent.  Id. at 1244; see also Ruf v. Commissioner,            
          T.C. Memo. 1993-81, affd. without published opinion 57 F.3d 1078            
          (9th Cir. 1995).                                                            
               Numerous factors in the present case lead us to conclude               
          that the plan allocations were not intended as compensation for             
          services rendered.  First, in 1990, 1991, and 1992, petitioner              
          paid Messrs. Blazick and Richter salaries and bonuses totaling              

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