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as of June 30, 1992, the outstanding balance of Simco’s loans to
John was reduced in an amount equal to the purported loan
repayment amount, Simco’s comptroller testified that such an
entry was likely made after that date. Based on the foregoing,
we hold that John is not entitled to exclude from income the
$33,870 in scrap metal proceeds he retained during the latter
half of 1991.
Compensation Deduction
Section 162(a)(1) allows as a deduction “a reasonable
allowance for salaries or other compensation for personal
services actually rendered”. The test for deductibility under
this provision is two-pronged: Payments are deductible as long
as they “(1) do not exceed the reasonable compensation for the
services actually rendered, and (2) are actually intended to be
paid purely for the services.” Electric & Neon, Inc. v.
Commissioner, supra at 1340; see sec. 1.162-7(a), Income Tax
Regs. Petitioners have the burden of proof. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933).
In the instant case, Simco fails the second prong, if not
both. To satisfy the second prong, the payments in question must
have been made with the intent to compensate. See King’s Court
Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511, 514 (1992)
(citing Paula Constr. Co. v. Commissioner, 58 T.C. 1055, 1058
(1972), affd. without published opinion 474 F.2d 1345 (5th Cir.
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