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Section 162(a)(1) provides that a taxpayer may deduct as an
ordinary and necessary expense “a reasonable allowance for
salaries or other compensation for personal services actually
rendered”. Thus, compensation is deductible only if it is
reasonable in amount and is paid or incurred for services
actually rendered. See sec. 1.162-7(a), Income Tax Regs.8
Whether an individual is an employee is essentially a
question of fact. See Air Terminal Cab, Inc. v. United States,
478 F.2d 575, 578 (8th Cir. 1973); Packard v. Commissioner, 63
T.C. 621, 629 (1975). Courts generally apply a common law agency
test to determine whether an employer-employee relationship
exists. See, e.g., Nationwide Mut. Ins. Co. v. Darden, 503 U.S.
318, 323-324 (1992); Community for Creative Non-Violence v. Reid,
490 U.S. 730, 751-752 (1989); Matthews v. Commissioner, 92 T.C.
351, 360 (1989), affd. 907 F.2d 1173 (D.C. Cir. 1990). Moreover,
where a family relationship is involved, the facts require close
scrutiny to determine whether a bona fide employer-employee
relationship existed and whether the payments received were made
8Whether amounts paid as wages are reasonable compensation
for services rendered is a question of fact to be decided on the
basis of the facts and circumstances of each case. See Charles
Schneider & Co. v. Commissioner, 500 F.2d 148, 151 (8th Cir.
1974), affg. T.C. Memo. 1973-130; Eller v. Commissioner, 77 T.C.
934, 962 (1981); Home Interiors & Gifts, Inc. v. Commissioner, 73
T.C. 1142, 1155 (1980); see also Martens v. Commissioner, T.C.
Memo. 1990-42, affd. without published opinion 934 F.2d 319 (4th
Cir. 1991).
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