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for salaries or other compensation for personal services actually
rendered”. Thus, compensation is deductible only if (1)
reasonable in amount and (2) paid or incurred for services
actually rendered. See sec. 1.162-7(a), Income Tax Regs., which
provides that “The test of deductibility in the case of
compensation payments is whether they are reasonable and are in
fact payments purely for services.” Whether amounts paid as
wages are reasonable compensation for services rendered is a
question of fact to be decided on the basis of the facts and
circumstances of each case. Estate of Wallace v. Commissioner,
95 T.C. 525, 553 (1990), affd. 965 F.2d 1038 (11th Cir. 1992).
Petitioners contend that Menards is entitled to deduct the
full amount of Mr. Menard’s compensation as an ordinary and
necessary business expense under section 162. In contrast,
respondent asserts that $19,261,609 of Mr. Menard’s compensation
is a disguised dividend.
A. Scope of the Notice of Deficiency
According to petitioners, the language in the notice of
deficiency explaining respondent’s determination that a portion
of Mr. Menard’s compensation was “unreasonable and excessive” did
not encompass respondent’s theory that the excess compensation
was a disguised dividend. Petitioners contend that the language
referred only to respondent’s determination that the amount of
Mr. Menard’s compensation was unreasonable. As a result,
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