-9-
128, affd. 85 F.3d 950 (2d Cir. 1996); sec. 1.162-9, Income Tax
Regs. Courts generally focus on the reasonableness requirement.
Elliotts, Inc. v. Commissioner, 716 F.2d 1241, 1243 (9th Cir.
1983), revg. and remanding T.C. Memo. 1980-282. "The inquiry into
reasonableness is a broad one and generally subsumes the inquiry
into compensatory intent." Summit Publg. Co. v. Commissioner, T.C.
Memo. 1990-288.
Five-Factor Test
The U.S. Court of Appeals for the Ninth Circuit uses a five-
factor test, as enumerated in Elliotts, Inc. v. Commissioner, supra
at 1245-1248, to determine reasonableness of compensation: (1) The
employee’s role in the company; (2) a comparison of the
compensation paid to the employee with the compensation paid to
similarly situated employees in similar companies; (3) the
character and condition of the company; (4) whether a conflict of
interest exists that might permit the company to disguise dividend
payments as deductible compensation; and (5) whether the
compensation was paid pursuant to a structured, formal, and
consistently applied program. No single factor is dispositive.
Pacific Grains, Inc. v. Commissioner, 399 F.2d 603, 606 (9th Cir.
1968), affg. T.C. Memo. 1967-7.
A detailed discussion of these factors is set forth in Leonard
Pipeline I. We will briefly summarize herein our findings with
respect to each factor, and, where appropriate, provide some
elaboration.
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