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We must next decide what constitutes reasonable compensation
for the services performed by Michael and Jody as employees.
Petitioners, relying on the agreements described supra, maintain
that it is reasonable for Michael and Jody to have received no
salaries for their services as employees. In the statutory
notices of deficiency, respondent determined that the following
amounts paid to or on behalf of Michael and Jody constitute
employee wages:
Year Michael Jody
1992 $46,000 ---
1993 86,000 $16,705
1994 61,000 23,415
Initially, we reject petitioners' claim that the failure to
pay employee wages to Michael and Jody is reasonable. We find
that the characterization in the aforementioned agreements of the
amounts paid to or on behalf of Michael and Jody do not reflect
the true character of such payments. See Joseph Radtke, S.C. v.
United States, 712 F. Supp. 143 (E.D. Wis. 1989), affd. per
curiam 895 F.2d 1196 (7th Cir. 1990).
The question left for us to decide is what constitutes
reasonable compensation for the personal services actually
rendered by Michael and Jody as employees. Sec. 162(a)(1); Roob
v. Commissioner, 50 T.C. 891, 898 (1968); sec. 1.162-7, Income
Tax Regs. Whether compensation is reasonable is a question to be
resolved on the basis of an examination of all the facts and
circumstances of the case. Kennedy v. Commissioner, 671 F.2d
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