Leonard Pipeline Contractors, Ltd. - Page 8

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          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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