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characterized as additional compensation, then the corporate
taxpayer is allowed a deduction. If the payment is characterized
as a dividend, no deduction is allowed. Thus, a corporate
taxpayer has an incentive to make purported compensation payments
which are in fact disguised dividends. As the majority opinion
correctly states, the payor’s intent is simply a pertinent factor
to consider, not a prerequisite to deductibility.7
6(...continued)
for deductibility under sec. 162(a)(1) is a two-prong test
requiring (1) that amount of compensation must be reasonable, and
(2) the payments must in fact be purely for services. Id. at
1243. The Court of Appeals then made the following observation:
The existence of a compensatory purpose can often be
inferred if the amount of the compensation is
determined to be reasonable under the first prong. For
these reasons, courts generally concentrate on the
first prong–-whether the amount of the purported
compensation is reasonable. Courts have generally not
delved into whether a compensatory purpose exists under
the second prong except in those rare cases where the
Commissioner has come forward with evidence that
purported compensation payments, although reasonable in
amount, were in fact disguised dividends. By and
large, the inquiry under section 162(a)(1) has turned
on whether the amounts of the purported compensation
payments were reasonable.
* * * * * * *
In the rare case where there is evidence that an
otherwise reasonable compensation payment contains a
disguised dividend, the inquiry may expand into
compensatory intent apart from reasonableness. * * *
[Id. at 1243-1244; citations and fn. refs. omitted.]
7In Kowalski v. Commissioner, 65 T.C. 44 (1975), revd. 544
F.2d 686 (3d Cir. 1976), revd. 434 U.S. 77 (1977), a Court-
reviewed opinion, this Court stated:
(continued...)
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