Pediatric Surgical Associates, P.C. - Page 16




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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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