26 CFR 1.162-7 - Compensation for personal services.

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There are 31 Updates appearing in the Federal Register for 26 CFR 1. View below or at eCFR (GPOAccess)
§ 1.162-7 Compensation for personal services.
(a) There may be included among the ordinary and necessary expenses paid or incurred in carrying on any trade or business a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services.
(b) The test set forth in paragraph (a) of this section and its practical application may be further stated and illustrated as follows:
(1) Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services and the excessive payments correspond or bear a close relationship to the stockholdings of the officers or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for the transfer of their business.
(2) The form or method of fixing compensation is not decisive as to deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid.
(3) In any event the allowance for the compensation paid may not exceed what is reasonable under all the circumstances. It is, in general, just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned.
(4) For disallowance of deduction in the case of certain transfers of stock pursuant to employees stock options, see section 421 and the regulations thereunder.

Title 26 published on 2014-04-01

The following are only the Rules published in the Federal Register after the published date of Title 26.

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  • 2014-08-06; vol. 79 # 151 - Wednesday, August 6, 2014
    1. 79 FR 45682 - Longevity Annuity Contracts; Correction
      GPO FDSys XML | Text
      DEPARTMENT OF THE TREASURY, Internal Revenue Service
      Correcting amendment.
      This correction is effective August 6, 2014 and applicable beginning July 2, 2014.
      26 CFR Part 1

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USC: Title 26a
U.S. Code: Title 29 - LABOR
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Reorganization ... 1978 Plan No. 4

Title 26 published on 2014-04-01

The following are ALL rules, proposed rules, and notices (chronologically) published in the Federal Register relating to 26 CFR 1 after this date.

  • 2014-08-06; vol. 79 # 151 - Wednesday, August 6, 2014
    1. 79 FR 45682 - Longevity Annuity Contracts; Correction
      GPO FDSys XML | Text
      DEPARTMENT OF THE TREASURY, Internal Revenue Service
      Correcting amendment.
      This correction is effective August 6, 2014 and applicable beginning July 2, 2014.
      26 CFR Part 1