26 C.F.R. § 1.162-9
Bonuses to employees
Bonuses to employees will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. It is immaterial whether such bonuses are paid in cash or in kind or partly in cash and partly in kind. Donations made to employees and others, which do not have in them the element of compensation or which are in excess of reasonable compensation for services, are not deductible from gross income.
Notes of Decisions
Cited in 30
cases (1 in the last 5 years), 1961–2023 · leading case: Anderson v. Comm'r, 67 T.C. 522 (Tax Ct. 1976).
Anderson v. Comm'r, 67 T.C. 522 (Tax Ct. 1976). “Nor is a different rule applicable merely because a subsidiary-parent relationship exists between the employer and payor corporations.”
Rapco, Inc. v. Comm'r, 69 T.C.M. 2238 (Tax Ct. 1995). “OPINION Section 162(a)(1) allows as a deduction "a reasonable allowance for salaries or other compensation for personal services actually rendered". Section 1.162-9, Income Tax Regs.”
Boyle Fuel Co. v. Comm'r, 53 T.C. 162 (Tax Ct. 1969). “Fundamentally, however, whether paid on a contingent basis or at a flat rate, the test of deductibility of compensation payments is whether they are reasonable and were in fact payments for services actually rendered rather than tax-motivated substitutes for distributions of…”
DiDonato v. Comm'r, 2013 T.C. Memo. 11 (Tax Ct. 2013). “DiDonato did not reveal in his testimony that DiDonato Builders was the contractor named in multiple construction permits to improve the personal residence.”
Winter v. Comm'r, 2010 T.C. Memo. 287 (Tax Ct. 2010). “1 million of the bonus in 2002—the portion that Winter earned that year.”
Alondra Indus. v. Comm'r, 1996 T.C. Memo. 32 (Tax Ct. 1996). “Extraordinary, unusual, and extravagant amounts paid by a corporation to its officers as purported compensation for their services, but having no substantial relation to the measure of their services and being disproportionate to their value, are not in reality payments for…”
Eaton Corp. v. Comm'r, 2017 T.C. Memo. 147 (Tax Ct. 2017). “Bonuses paid to employees are deductible "when * * * made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated *345 salaries, do not exceed reasonable compensation for the services…”
Leonard Pipeline Contrs., Ltd. v. Comm'r, 1998 T.C. Memo. 315 (Tax Ct. 1998). “1996) ; sec. 1.162-9, Income Tax Regs. Courts generally focus on the reasonableness requirement.”
LabelGraphics, Inc. v. Comm'r, 1998 T.C. Memo. 343 (Tax Ct. 1998). “More specifically, bonuses paid to employees are deductible "when * * * made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation…”
Donald Palmer Co. v. Comm'r, 69 T.C.M. 1869 (Tax Ct. 1995). “" Section 1.162-9, Income Tax Regs. , provides that bonuses paid to employees are deductible "when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, *72 when added to the stipulated…”
Alpha Med. v. Comm'r, 1997 T.C. Memo. 464 (Tax Ct. 1997). “3 Neither party has suggested that Rogers did not render valuable services to petitioner. Accordingly, we will focus on the first element of the deductibility test -- whether the amounts of the payments were reasonable.”
Clary Hood, Inc. v. Comm'r of Internal Revenue, 69 F.4th 168 (4th Cir. 2023). “26 C.F.R. § 1.162-9 . In cases that involve “a closely held corporation whose controlling shareholders set their own level of compensation, the reasonableness of the compensation paid to the shareholder-employee is subject to close scrutiny.”
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