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During 1989 through 1993, petitioner's account executives
earned both a salary and commissions. The bulk of their
compensation each year was earned as commissions. Most account
executives were paid a salary of $600 per month, although some
received a higher salary. The account executives earned a
commission of 25 percent of the gross margin on sales they
generated. The commission paid by petitioner was a quarter to a
third higher than generally paid in the industry.
Petitioner employed "consultative" selling techniques
designed by Herold to differentiate itself in the marketplace and
to justify higher-than-average markups. This strategy required
that petitioner's account executives provide services beyond
those normally provided in the industry. Petitioner's account
executives spent more time with each customer than required of
the competitors' account executives. Herold believed that this
justified a more generous commission structure. Beyond that,
Herold felt it was worthwhile to pay higher compensation to
attract and retain the best people.
OPINION
We are faced with perhaps one of the most litigated issues
in Federal income taxation, the deductibility of compensation
paid to shareholder/employees of a closely held corporation. In
order for employee compensation to be deductible by an accrual
method taxpayer like petitioner, the compensation must be:
(1) Incurred in the taxable year for services rendered to the
taxpayer in the conduct of its trade or business, (2) reasonable
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