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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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