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Respondent, in addition to again referencing substantiation,
counters that the bonuses may not now be deducted as compensation
because there exists no proof the payments were intended as such
at the time made. Respondent asserts that since the amounts were
not included in the wages of the R&J employees, petitioners are
precluded from construing them as compensation at this juncture.
According to respondent, the bills must be treated as gifts and
any deductions, if substantiated, would at best be limited to $25
by section 274(b). Furthermore, to the extent that an employee
received both a $100 bill and a gift basket, respondent maintains
that only a single $25 deduction is potentially allowable.
Regulations promulgated under section 162 speak to the issue
of when bonuses to employees are deductible as compensation:
Bonuses to employees will constitute allowable
deductions from gross income when such payments are
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 reasonable compensation for
the services rendered. It is immaterial whether such
bonuses are paid in cash or in kind or partly in cash
and partly in kind. Donations made to employees and
others, which do not have in them the element of
compensation or which are in excess of reasonable
compensation for services, are not deductible from
gross income. [Sec. 1.162-9, Income Tax Regs.]
Whether the requisite compensatory intent has been shown in
a particular case is a factual question to be decided on the
basis of all relevant circumstances. See Electric & Neon, Inc.
v. Commissioner, 56 T.C. 1324, 1340 (1971), affd. without
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