Compact Equipment Company - Page 17

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          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.               

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