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In the notice of deficiency, respondent disallowed
$1,084,719 of the officer compensation deducted in 1995 (allowing
$210,169) and disallowed $898,560 deducted in 1996 (allowing
$201,205). On brief, respondent now contends that officer
compensation in excess of $435,450 ($243,000 paid to Dennis and
$192,450 to Curtis) in 1995 and in excess of $460,950 ($258,600
paid to Dennis and $202,350 to Curtis) in 1996 was unreasonable,
was disguised dividends, and was not compensation for services
Dennis and Curtis rendered to petitioner.
B. Controlling Factors
A taxpayer may deduct payments for compensation if the
amount paid is reasonable and for services actually rendered.
See sec. 162(a)(1). The reasonableness of compensation is a
question of fact that must be answered by comparing each
employee's compensation with the value of services that he or she
performed in return. See RTS Inv. Corp. v. Commissioner, 877
F.2d 647, 650 (8th Cir. 1989), affg. per curiam T.C. Memo. 1987-
98; Charles Schneider & Co. v. Commissioner, 500 F.2d 148, 151
(8th Cir. 1974), affg. T.C. Memo. 1973-130; Estate of Wallace v.
Commissioner, 95 T.C. 525, 553 (1990), affd. 965 F.2d 1038 (11th
Cir. 1992). Where, as in this case, the corporation is
controlled by the same employees to whom the compensation is
paid, there is a lack of arm's-length bargaining. Special
scrutiny must be given to bonus payments paid under such
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