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the relevant statute4 and regulations5 do not require an “intent
to compensate” as a prerequisite to deductibility under section
162(a)(1). Although an “intent to compensate” requirement has
been applied by the courts in numerous cases, the instant
situation is factually distinguishable from the situation in
those cases which involved corporate payments to shareholders or
employees in positions of control. E.g., Paula Constr. Co. v.
Commissioner, 58 T.C. 1055, 1058-1059 (1972), affd. without
published opinion 474 F.2d 1345 (5th Cir. 1973). In the context
of corporate payments to shareholders, careful scrutiny is
required to determine whether the alleged compensation is in fact
a disguised dividend. Owensby & Kritikos, Inc. v. Commissioner,
819 F.2d 1315, 1324 (5th Cir. 1987), affg. T.C. Memo. 1985-267;
Home Interiors & Gifts, Inc. v. Commissioner, 73 T.C. 1142, 1156
(1980).6 If a corporate payment to a shareholder/employee is
4Sec. 162(a)(1) allows a deduction for all ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business, including “a reasonable
allowance for salaries or other compensation for personal
services actually rendered”.
5“The test of deductibility in the case of compensation
payments is whether they are reasonable and are in fact payments
purely for services.” Sec. 1.162-7(a), Income Tax Regs.
6In Elliotts, Inc. v. Commissioner, 716 F.2d 1241 (9th Cir.
1983), revg. and remanding T.C. Memo. 1980-282, the Court of
Appeals for the Ninth Circuit discussed the problem of
determining whether purported compensation payments are in fact
disguised dividends. The Court of Appeals noted that the test
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