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provided all relevant information to their accountant and relied
upon his expertise and judgment in the preparation and reporting
of Federal income.
OPINION
I. Reasonable Compensation
The parties disagree about the methodology to be used for
measuring or determining the amount of reasonable compensation.
They also rely on differing facts in applying the standards.
Section 162 provides for deductions for ordinary and necessary
expenses incurred in carrying on a trade or business, including a
reasonable allowance for salaries or compensation for services
performed.
Respondent, emphasizing case law from opinions of the Court
of Appeals for the Ninth Circuit,3 argues that when payments are
made to a corporate employee who is also a principal shareholder,
the compensation must be reasonable in amount and have a purely
compensatory purpose. See O.S.C. & Associates, Inc. v.
Commissioner, 187 F.3d 1116, 1119-1120 (9th Cir. 1999) (and cases
cited therein), affg. T.C. Memo. 1997-300.
Respondent also points out that the Court of Appeals for the
Ninth Circuit traditionally has looked to five factors, none of
which is decisive, to evaluate whether compensation is
reasonable, to wit: (1) The employee’s role in the company; (2)
3 Barring a stipulation to the contrary, any appeal from
this Court’s decision would be to the Court of Appeals for the
Ninth Circuit. See sec. 7482(b).
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Last modified: May 25, 2011