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petitioners to prove that they are entitled to deduct an amount
greater than that determined by respondent.9 Rule 142(a); Paula
Constr. Co. v. Commissioner, supra at 1058; Elec. & Neon, Inc. v.
Commissioner, supra at 1340.
While compensation for personal services is a deductible
expense, distributions of corporate earnings and profits
constitute dividends and are not deductible. Therefore, a
corporation has an incentive to characterize as compensation
payments which are actually distributions of profits. Sec.
1.162-7(b)(1), Income Tax Regs. Thus, the Court must closely
scrutinize the alleged compensation paid to determine if it is a
disguised distribution of profits. Pulsar Components Intl, Inc.
v. Commissioner, supra; Mad Auto Wrecking, Inc. v. Commissioner,
T.C. Memo. 1995-153.
The provision of services by one company to another company
does not alone establish the existence of a business relationship
consistent with the payment of compensation. Eyefull, Inc. v.
Commissioner, supra (citing Paula Constr. Co. v. Commissioner,
supra at 1058). “There must also be evidence that at the time
9 Pursuant to sec. 7491, the burden of proof can be shifted
to respondent if certain conditions are met, including that the
examination was commenced before July 22, 1998. Internal Revenue
Restructuring & Reform Act of 1998, Pub. L. 105-206, sec.
3001(c), 112 Stat. 727; Higbee v. Commissioner, 116 T.C. 438
(2001). The examination in this case commenced before the
effective date. Accordingly, sec. 7491 is not applicable to this
case.
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