Vitamin Village, Inc. - Page 13
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Section 162(a)(1) permits a taxpayer to deduct “a reasonable
allowance for salaries or other compensation for personal
services actually rendered”. A taxpayer is entitled to a
deduction for compensation only if the payments were reasonable
in amount and in fact paid purely for services. Sec. 1.162-7(a),
Income Tax Regs.14 Although framed as a two-prong test, the
inquiry under section 162(a)(1) generally turns on whether the
amounts of the purported compensation payments were reasonable.
Elliotts, Inc. v. Commissioner, 716 F.2d 1241, 1245 (9th Cir.
1983), revg. T.C. Memo. 1980-282. Petitioner has the burden of
proving the payments to Mr. Reeves were reasonable. See Rule
Because petitioner’s place of business is in the State of
Oregon, absent stipulation otherwise, an appeal of this case
would go to the Court of Appeals for the Ninth Circuit. See sec.
7482(b)(1)(B). That Court of Appeals uses five factors to
determine the reasonableness of compensation, with no single
factor being determinative. Elliotts, Inc. v. Commissioner,
supra. The factors are: (1) The employee’s role in the company;
(2) comparison with other companies; (3) the character and
condition of the company; (4) potential conflicts of interest;
and (5) internal consistency in compensation. Id. at 1245-1248.
14 Respondent argues only that the amount of compensation
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Last modified: November 10, 2007