J. Michael Joly and Bonnie B. Joly, Jody Steven Joly, and David Andrew Joly - Page 10

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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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