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Although the taxpayer did not contend that the disguised dividend
argument constituted a new matter, citing Nor-Cal Adjusters, we
noted that we would have rejected any such argument. See E.J.
Harrison & Sons, Inc. v. Commissioner, supra.
We agree with respondent that the notice of deficiency was
broad enough to encompass a disguised dividend theory. The
phrase “unreasonable and excessive” implicitly invoked section
162(a)(1), which expressly provides that the compensation must be
for personal services actually rendered. See also section 1.162-
7(a), Income Tax Regs., which confirms that there is a single
test for deductibility of compensation that examines whether the
payments were reasonable and, in fact, were payments purely for
services. Moreover, Menards’s characterization in its petition
of Mr. Menard’s compensation as “an ordinary and necessary
business expenditure”, which respondent then denied in the
answer, demonstrated Menards’s understanding that section
162(a)(1) was involved. See Zmuda v. Commissioner, 731 F.2d
1417, 1420 (9th Cir. 1984) (taxpayer’s comprehension of the
theories encompassed by the notice’s language was evident in the
pleadings), affg. 79 T.C. 714 (1982).
For the above reasons, therefore, we conclude that the
notices of deficiency were sufficient to raise both the
“reasonableness” and “purely for services” prongs of the section
162 test for deductibility of the compensation at issue and that
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