- 64 -
appears that profits were being siphoned out of the company
disguised as salary. See id. at 1327.
The ability to disguise dividends as salary, particularly if
the employee is the sole or majority shareholder, or if a large
percentage of the compensation is paid as a bonus, may suggest
that compensation is not reasonable. See RAPCO, Inc. v.
Commissioner, 85 F.3d at 954. Payment of bonuses at the end of a
tax year when a corporation knows its revenue for the year may
enable it to disguise dividends as compensation. See Owensby &
Kritikos, Inc. v. Commissioner, supra at 1329; Estate of Wallace
v. Commissioner, 95 T.C. at 555-556. The large yearend payments
made to Dennis and Curtis suggest that part of their compensation
was disguised dividends. See Petro-Chem Mktg. Co. v. United
States, 221 Ct. Cl. 211, 602 F.2d 959, 968 (1979); Builders Steel
Co. v. Commissioner, 197 F.2d 263, 264 (8th Cir. 1952); Owensby &
Kritikos, Inc. v. Commissioner, T.C. Memo. 1985-267; Rich Plan,
Inc. v. Commissioner, T.C. Memo. 1978-514.
Whether petitioner in fact intended to pay Dennis and Curtis
those amounts as salaries is material because to be deductible
under section 162(a)(1) they must be paid for services actually
rendered as well as be reasonable in amount.
The following factors indicate that payments to shareholder
officers may be disguised dividend distributions rather than
payment for services rendered:
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