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We reject petitioners’ argument. We cannot discern any
intention on the part of the Court of Appeals to incorporate a
bad faith requirement into the analysis of whether compensation
is paid purely for services. The Court of Appeals in Exacto
Spring Corp. referenced the two-prong test under section 162 and
stated that deductible compensation under section 162 must be
both reasonable in amount and a payment purely for services. Id.
at 839. In addressing the hypothetical case of a CEO who
rendered no services to his company yet received a substantial
salary, the Court of Appeals stated as follows:
The multi-factor test would not prevent the Tax Court
from allowing a deduction in such a case even though
the corporation obviously was seeking to reduce its
taxable income by disguising earnings as salary. The
court would not allow the deduction, but not because of
anything in the multi-factor test; rather because it
would be apparent that the payment to the employee was
not in fact for his services to the company. Treas.
Reg. �1.162-7(a); * * *.
Id. at 835.
The Court of Appeals did not reject section 1.162-7, Income Tax
Regs. Instead, as evidenced by the above quotation, the Court of
Appeals cites and relies on it for the proposition that
compensation that is not paid purely for services is not
deductible under section 162.
Section 1.162-7(b)(1), Income Tax Regs., speaks specifically
to the “purely for services” prong of the test under section 162.
It states as follows:
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