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officers’ compensation in the amounts of $140,776 and $19,450,
for 1994 and 1995, respectively (the remaining amounts).
Section 162(a)(1) (set forth supra in section I.D.) allows a
deduction for payments of “a reasonable allowance for salaries or
other compensation for personal services actually rendered”.
Respondent’s ground for disallowing petitioner’s deduction for
the remaining amounts is that such amounts are disguised
dividends rather than compensation for services.
B. Question Before Us
1. Introduction
As discussed supra in section I.D., section 162(a)(1)
establishes a two-pronged test for determining whether a payment
is deductible as compensation for services. The payment must be
both reasonable and, in fact, purely for services. In part, the
parties have directed their arguments to the reasonableness
aspect of that test. We do not believe, however, that whether
the return amounts were reasonable in amount is actually in
question.4 The question framed by the parties’ briefs is whether
the remaining amounts were paid to the shareholder surgeons
purely for their services. In respondent’s opening brief,
respondent relies on the following point: “The respondent
4 For 1995, petitioner deducted $1,508,675 as officers’
compensation, and, after concessions, respondent would disallow
$19,450, which is 1.29 percent of the amount deducted. We
hesitate to conclude that respondent would ask us to find that
compensation was unreasonable based on such a small variance.
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