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E. Discussion
By the notice, respondent explains the principal adjustments
on the grounds that petitioner has failed to establish that the
disallowed amounts “were for officers compensation.” Further,
respondent avers that the disallowed amounts “were a distribution
of earnings and profits to * * * [the shareholder surgeons]”.
Although section 162(a) is not mentioned in the notice, its
provisions are implicit in respondent’s explanation that
petitioner has failed to establish that the disallowed amounts
were for officers’ compensation. It is not implicit in the
notice, however, that respondent has denied a deduction for
officers’ compensation exclusively because petitioner has failed
to establish that such compensation was reasonable in amount.
Section 162(a)(1) establishes a two-pronged test for the
deductibility of payments purportedly paid as salaries or other
compensation for personal services actually rendered (without
distinction, compensation for services). To be deductible as
compensation for services, the payments must be (1) “reasonable”
and (2) “in fact payments purely for services.” Sec. 1.162-7(a),
Income Tax Regs.; see also Nor-Cal Adjusters v. Commissioner,
T.C. Memo. 1971-200, affd. 503 F.2d 359 (9th Cir. 1974). If
anything, the notice indicates that it is the second prong–-that
the disallowed amounts were not, in fact, payments purely for
services--that concerned respondent. The notice explains
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