- 17 -
will apply only to the portion of the underpayment which is
attributable to fraud.
A. Construction Expenses
1. Underpayment
Respondent must prove by clear and convincing evidence that
petitioner underpaid its taxes during each of the taxable periods
at issue. See sec. 7454(a); Rule 142(b). Respondent contends
that the construction expenses paid by petitioner on behalf of
Atkinson constitute nondeductible constructive dividends and that
petitioner underpaid its taxes when it deducted the constructive
dividends. Petitioner argues that although petitioner improperly
classified the construction expenses as cost of goods sold on its
tax returns, the construction expenses actually constitute
reasonable compensation for services rendered by Atkinson and
therefore are deductible by petitioner.
Section 162(a)(1) permits a taxpayer to deduct "a reasonable
allowance for salaries or other compensation for personal
services actually rendered" as an ordinary and necessary business
expense. See King's Ct. Mobile Home Park, Inc. v. Commissioner,
98 T.C. 511, 514 (1992); Paula Constr. Co. v. Commissioner, 58
T.C. 1055, 1058 (1972), affd. without published opinion 474 F.2d
1345 (5th Cir. 1973); sec. 1.162-7(a), Income Tax Regs. The
taxpayer, however, can deduct payments for personal services only
if the payments are intended as compensation. See King's Ct.
Page: Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 NextLast modified: May 25, 2011