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respondent’s adjustment on the grounds that the disallowed
amounts were a distribution of earnings and profits. By the
petition, petitioner avers that respondent’s theory is
exclusively a “reasonable compensation” theory. By the answer,
respondent denies that averment. Petitioner has failed to prove
that respondent’s notice theory is exclusively a reasonable
compensation theory and is not premised on a failure by
petitioner to establish that the disallowed amounts were paid
purely for services.
Respondent’s position on brief is that a portion of what
petitioner has treated as compensation to the shareholder
surgeons is profit attributable to services performed by the
nonshareholder surgeons, which should be treated as a
nondeductible, disguised dividend rather than as deductible
compensation. Respondent has not raised a new matter. The
notice fairly puts petitioner on notice that respondent is
challenging the bona fides of the disallowed amounts as “officers
compensation”. Petitioner clearly understood that section
162(a)(1) was involved. Respondent’s concession dramatically
decreases the proposed deficiencies and, together with
respondent’s position on brief, delimits petitioner’s obligation
to prove compliance with the second prong of the section
162(a)(1) test.
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