- 15 -
in amount, and (3) ordinary and necessary in character. Sec.
162(a)(1); sec. 1.162-7(a), Income Tax Regs. While each
criterion may be at issue from time to time, it is the
reasonableness standard that presents the most difficult issue.
As the Court has observed:
Inherently, there is a natural tension between:
(1) Shareholders/employees who feel that they are entitled
to be paid from a corporation's profits, even to the
exhaustion thereof, of an amount that reflects their
skills and efforts, and (2) a provision in the tax law
that conditions the deductibility of compensation on the
concept of reasonableness. What is reasonable to the
entrepreneur/employee often may not be to the tax
collector. * * * The term "reasonable", however, must
reflect the intrinsic value of employees in the broadest
and most comprehensive sense. [Mad Auto Wrecking, Inc. v.
Commissioner, T.C. Memo. 1995-153.]
The parties do not dispute that Herold's compensation was an
ordinary and necessary expense of petitioner or that it was paid
for services which he rendered to petitioner. Thus, we assume it
was and limit our discussion to the question of reasonableness.
The reasonableness of compensation is a question of fact
that must be answered by comparing each employee's compensation
with the value of services that he or she performed in return.
RTS Inv. Corp. v. Commissioner, 877 F.2d 647, 650 (8th Cir.
1989), affg. per curiam T.C. Memo. 1987-98; Charles Schneider &
Co. v. Commissioner, 500 F.2d 148, 151 (8th Cir. 1974), affg.
T.C. Memo. 1973-130; Estate of Wallace v. Commissioner, 95 T.C.
525, 553 (1990), affd. 965 F.2d 1038 (11th Cir. 1992). The
Commissioner's determination as to the reasonableness of
compensation is presumed correct, and taxpayers like petitioner
Page: Previous 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 NextLast modified: May 25, 2011