-8-
after-tax net income of $1,705,958, which was all attributable to
Mr. Leonard's efforts; (3) the board of directors minutes supported
the notion that in paying Mr. Leonard in 1987, petitioner was
attempting in part to compensate him for services performed in 1985
and 1986; and (4) petitioner never provided Mr. Leonard with
retirement benefits, which an individual in his position justly
deserved. These four factors led us to the conclusion that we must
set aside respondent's determination in the notice of deficiency.
Because, in our opinion, petitioner had proven respondent’s
determination incorrect, we were forced to decide the proper amount
of reasonable compensation on the basis of the entire record before
us. See Pepsi-Cola Bottling Co. v. Commissioner, 61 T.C. 564, 568
(1974), affd. 528 F.2d 176 (10th Cir. 1975).
Section 162(a)(1) Deduction
Section 162(a)(1) permits a corporation to deduct “a
reasonable allowance for salaries or other compensation for
personal services actually rendered” as an ordinary and necessary
business expense. Compensation payments are deductible under
section 162(a)(1) if they are reasonable and paid “purely for
services” rendered to the business. Sec. 1.162-7(a), Income Tax
Regs. Bonuses paid to employees are deductible only when made in
good faith and as additional compensation for services actually
rendered by the employees, provided that when added to the
salaries, they do not exceed reasonable compensation for the
services rendered. RAPCO, Inc. v. Commissioner, T.C. Memo. 1995-
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