E.J. Harrison and Sons, Inc. - Page 16

                                       - 16 -                                         
          Sec. 1.162-7(a), Income Tax Regs.; see also Nor-Cal Adjusters v.            
          Commissioner, 503 F.2d 359, 362 (9th Cir. 1974), affg. T.C. Memo.           
          1971-200.                                                                   
               B.  Positions of the Parties                                           
               Respondent argues that petitioner’s deductions for                     
          compensation paid to Mrs. Harrison during the audit years should            
          be reduced as follows:                                                      
          Amount          Amount         Amount                                       
          TYE 6/30       deducted        allowed       disallowed                     
          1995         $860,682        $54,215        $806,467                        
          1996          818,059         56,040         762,019                        
          1997          600,059         58,734         541,325                        
          Respondent argues that the disallowed amounts are “unreasonable             
          and excessive compensation”.  Respondent considers Mrs.                     
          Harrison’s services equivalent to those provided by an outsider             
          serving as chair of a corporation’s board of directors, and the             
          amounts respondent allowed as reasonable compensation for the               
          audit years reflect respondent’s concession as to the amounts               
          properly attributable to those services.  Respondent also argues            
          that the disallowed amounts were intended to be disguised                   
          dividends to Mrs. Harrison rather than payments for services                
          rendered.2                                                                  

               2  Respondent’s “disguised dividend” argument is raised for            
          the first time on brief.  Petitioner has not argued that the                
          introduction of that argument on brief constitutes the raising of           
          a “new matter” requiring respondent to bear the burden of proof             
          with respect to that matter.  See Rule 142(a).  Had petitioner              
          made that argument, we would have rejected it for the reasons set           
                                                             (continued...)           




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