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OPINION
Section 162(a)(1) allows as a deduction “a reasonable
allowance for salaries or other compensation for personal
services actually rendered”. Section 1.162-7(a), Income Tax
Regs., provides a two-part test for deductibility of
compensation: (1) Whether the payment was purely for services
rendered and (2) whether the amount paid was reasonable. See
Estate of Wallace v. Commissioner, 95 T.C. 525, 552 (1990), affd.
965 F.2d 1038 (11th Cir. 1992). Section 1.162-9, Income Tax
Regs., provides that bonuses paid to employees are deductible
“when such payments are made in good faith and as additional
compensation for the services actually rendered by the employees,
provided such payments, when added to the stipulated
salaries, do not exceed a reasonable compensation for the
services rendered.”
Whether an expense that is claimed pursuant to section
162(a)(1) is reasonable compensation for services rendered is a
question of fact that must be decided on the basis of the
particular facts and circumstances. Estate of Wallace v.
Commissioner, supra at 553; Paula Constr. Co. v. Commissioner, 58
T.C. 1055, 1058-1059 (1972), affd. without published opinion 474
F.2d 1345 (5th Cir. 1973). The burden is on petitioner to show
that it is entitled to a compensation deduction larger than that
allowed by respondent. Welch v. Helvering, 290 U.S. 111, 115
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Last modified: May 25, 2011