- 16 -
Chief Executive Officer [$]186,420
Chief Financial Officer 59,150
Chief Operations/Administrative
Officer 162,095
Marketing Executives 113,424
521,089
Bonus (no adjustment to amount
paid by TP as bonuses) 183,000 FY 7/95
55,800 FY 7/96
Total compensation allowed 759,889
OPINION
This is yet another case in which a closely held C
corporation--whose shareholders have never elected pass-through
treatment under subchapter S-–faces the burden of justifying the
deductibility for U.S. corporation income tax purposes of amounts
paid to them as compensation that respondent claims to be
unreasonable and excessive.
Section 162(a)(1) allows as a business deduction “a
reasonable allowance for salaries or other compensation for
personal services actually rendered”. A two-prong test
determines the deductibility of payments as compensation: (1)
Whether the amount claimed to be deductible as compensation is
reasonable in relation to services performed, and (2) whether the
payment is in fact purely for services rendered. Sec. 1.162-
7(a), Income Tax Regs. Bonuses paid to employees are deductible
“when * * * made in good faith and as additional compensation for
the services actually rendered by the employees, provided such
payments, when added to the stipulated salaries, do not exceed a
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