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OPINION
Section 162(a)(1) permits a taxpayer to deduct “a reasonable
allowance for salaries or other compensation for personal
services actually rendered”. A taxpayer can take a deduction for
compensation only if: (1) The payments were reasonable in
amount, and (2) the payments were for services actually rendered.
Sec. 1.162-7(a), Income Tax Regs.
Petitioner argues that the total compensation it paid to its
shareholder-employees was deductible because it was reasonable
under section 162(a). Respondent avers that the amounts of
compensation for petitioner’s tax years ended June 30, 1998
through 2000, were unreasonable and were, instead, disguised
dividends. In this case, the parties agree that the sole issue
is whether the payments petitioner made to its shareholder-
employees were reasonable.
I. Applicable Caselaw
Because this case appears to be appealable to the Court of
Appeals for the Eighth Circuit, see sec. 7482(b)(1)(B), we shall
follow the relevant decisions of that circuit, see Golsen v.
Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.
1971).
Whether the compensation paid by a corporate taxpayer to a
shareholder-employee was reasonable is a question of fact.
Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d 1315, 1323
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Last modified: May 25, 2011