5th Cir. Pattern Jury Instr. (Civil) 12.1

Employee

Plaintiff [name] is entitled to certain tax deductions that are ordinary and necessary business expenses, such as reasonable salaries or other compensation

paid for personal services actually rendered. A corporation, however, is not entitled to a deduction for dividends it pays to its shareholders. Dividends a corporation pays to its shareholders are a distribution of

profits, not deductible expenses.

The Commissioner of Internal Revenue must disallow any portion of a compensation deduction that the

Commissioner believes is (1) not compensation or (2)

unreasonable in amount. This prevents a corporation

from improperly reducing its taxes by distributing all

or some of its profits to its shareholders and calling the

distribution something else, like salaries.

You must decide whether Plaintiff [name] may

deduct on its federal income tax returns certain

amounts it says it paid as salaries for the years

involved. To be entitled to the salary deduction claims,

Plaintiff [name] must establish each of the following

elements by a preponderance of the evidence:

1. that the payments were actually paid as compensation for services rendered and were not a

distribution of the profits of the business; and

2. that the payments are reasonable when compared with the personal services actually

rendered.

The fact that Plaintiff [name] called the payments

salary, compensation or bonus is not determinative.

Reasonable compensation is the amount that is

paid for similar services, by similar enterprises, under

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similar circumstances, to a qualified person, whether

that person is a shareholder of the corporation or not.

In deciding what is reasonable compensation, you

may consider all of the following factors:

1. The size, nature and complexity of Plaintiff

[name]’s business.

2. The quality and quantity of the services actually rendered by the employee, including the

difficulty or simplicity of the work and the

responsibility assumed by the employee.

3. The qualifications, experience and background

of the employee, including any special training

and formal education.

4. Whether or not all of the employee’s time was

devoted to the business, or whether the employee devoted time to other businesses, interests and activities.

5. The salaries paid to others employed by the

Plaintiff [name] and whether and how much

stock they owned in the corporation.

6. What a comparable business pays for comparable services.

7. The relationship between the amounts paid to

the employee and the employee’s shareholdings

in Plaintiff [name].

8. The dividend history of Plaintiff [name].

9. Whether the amount paid was set or adjusted

after the profits for the year were known.

10. The extent of control which the employee or a

member of the employee’s family had over the