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359, 362 (9th Cir. 1974), affg. T.C. Memo. 1971-200; Paula
Construction Co. v. Commissioner, 58 T.C. at 1059.
Where officer-shareholders who are in control of a
corporation set their own compensation, careful scrutiny is
required to determine whether the alleged compensation is in fact
a distribution of profits. Rutter v. Commissioner, 853 F.2d
1267, 1270-1271 (5th Cir. 1988), affg. T.C. Memo. 1986-407;
Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d at 1324;
Estate of Wallace v. Commissioner, 95 T.C. at 556; sec. 1.162-
7(b)(1), Income Tax Regs.
We will consider first whether (and, if so, then to what
extent) the payments to Jack exceeded reasonable compensation,
and then whether (and, if so, then to what extent) any part of
the payments that survive the first test should nevertheless be
nondeductible because they were not intended to be compensation.
Compare Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d at
1325 (payments made in the form of compensation), with Paula
Construction Co. v. Commissioner, 58 T.C. at 1057, 1059-1060
(payments made in the form of distributions), and King’s Court
Mobile Home Park v. Commissioner, 98 T.C. 511, 514-515 (1992)
(corporation’s unreported income diverted to shareholder).
1. Reasonableness
Many factors are relevant in determining whether amounts
paid to a person were reasonable compensation, including the
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