Frank and Virginia Muhich - Page 20

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          Midwest as compensation for petitioner's services.13  We agree              
          with Midwest that the "consulting fees" are deductible                      
          compensation for petitioner's service.  We agree with respondent            
          that these "fees" are includable in petitioner's gross income,              
          but as compensation rather than dividends.                                  
               A payment to a shareholder/employee is compensation if:  (a)           
          The corporation intends the payment to be solely for services               
          rendered by the shareholder/employee, and (b) the amount paid is            
          reasonable as to the services rendered.  See Electric & Neon,               
          Inc. v. Commissioner, 56 T.C. 1324 (1971), affd. without                    
          published opinion 496 F.2d 876 (5th Cir. 1974); sec. 1.162-7,               
          Income Tax Regs.  A corporation's intent to compensate for                  
          services is a condition precedent to the underlying payment's               
          deductibility, see Electric & Neon, Inc. v. Commissioner, supra,            
          and such an intent is determined when the payment is made, see              
          Paula Constr. Co. v. Commissioner, 58 T.C. 1055 (1972), affd.               
          without published opinion 474 F.2d 1345 (5th Cir. 1973).  An                
          intent to compensate is a question of fact, which in the case of            
          a corporation turns on the actions of the officers.  See King's             
          Court Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511, 514              
          (1992).  We employ close scrutiny when a shareholder/employee               

               13 Petitioner fails to acknowledge that if the amounts are             
          compensation, he must include them in income.                               

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