It is now settled law that only if payment is made with the intent to compensate is it deductible as compensation. Charles McCandless Tile Service v. United States, [191 Ct.Cl. 108] 422 F.2d 1336, 1339 (Ct.Cl. 1970); Northlich, Stolley, Inc. v. United States, supra [177 Ct.Cl. 435, 368 F.2d] at 278 [1966]; Irby Construction Co. v. United States, [154 Ct.Cl. 342], 290 F.2d 824, 826 (Ct.Cl. 1961); Electric Neon, Inc., supra at 1340; Klamath Medical Service Bureau, 29 T.C. 339, 347 (1957), affd. 261 F.2d 842 (C.A. 9, 1958), certiorari denied 359 U.S. 966 [ 79 S.Ct. 877, 3 L.Ed.2d 834] (1959); Twin City Tile Marble Co., 6 B.T.A. 1238, 1247 (1927), aff'd. 32 F.2d 229 (C.A. 8, 1929). Whether such intent has been demonstrated is a factual question to be decided on the basis of the particular facts and circumstances of the case.

It is well settled that whether compensation is reasonable for tax-deduction purposes is a question of fact which, there being no universal rule to determine the answer, must be decided on the basis of a review of all the facts in each particular case. See, Irby Construction Co. v. United States, 154 Ct.Cl. 342, 290 F.2d 824 (1961); Bringwald, Inc. v. United States, 167 Ct.Cl. 341, 334 F.2d 639 (1964); Jones Brothers Bakery, Inc. v. United States, 188 Ct.Cl. 226, 411 F.2d 1282 (1969); Stiening v. Commissioner of Internal Revenue, 147 F.2d 204 (3d Cir. 1945). This court, in Irby Construction Co. v. United States, supra, described the issue under consideration there, now here, in the following language, 167 Ct.Cl. at page 346, 290 F.2d at 826:

GC questions the correctness of the determinations by the Internal Revenue Service that portions of the amounts paid to Arnold Van Etten and William R. Griffin as compensation for 1960 and 1961 did not constitute reasonable compensation and were not deductible by GC. There is no definite formula by which the question of the reasonableness, for income tax purposes, of compensation in any particular instance can be determined. Irby Construction Co. v. United States, 290 F.2d 824, 826, 154 Ct.Cl. 342, 346 (1961). This is a question of fact that must be determined upon the basis of all the facts in each separate case.

Among other things, we there stated: Generally speaking, the fact that compensation is based on a contingent compensation agreement, if fixed pursuant to a free bargain, is an element tending to show reasonableness. Bank of Palm Beach v. United States, 476 F.2d 1343, 1348 [201 Ct.Cl. 325] (Ct.Cl. 1973); Irby Constr. [Irby Constr. Co. v. United States] supra [ 290 F.2d 824, 154 Ct.Cl. 342], at 827. However, where the corporation is controlled by the very employees to whom the compensation is paid, special scrutiny must be given to such salaries, for there is a lack of arm's length bargaining as required by Treasury Regulation § 1.162-7(a)(2).

Mayson Mfg. Co. v. Commissioner, 178 F.2d 115, 119 (6th Cir. 1949).See also Hammond Lead Products, Inc. v. Commissioner, 425 F.2d 31, 33 (7th Cir. 1970), quoting 4A Mertens, Law of Federal Income Taxation, § 25.69 at 282 (1966); Irby Constr. Co. v. United States, 154 Ct.Cl. 342, 290 F.2d 824, 826 (1961). In the instant case, the petitioners strenuously advocate that because the compensation paid to their employees was paid pursuant to contingent compensation agreements, the reasonableness of which must be measured by conditions existing at the time of their execution, the compensation must necessarily have been reasonable.

With respect to the substantial bonus paid to each of the three officers in each of the 4 years involved, and bearing in mind their relative stock holdings, consideration is given to the principle that a bonus paid to a non-stockholder employee, which is reasonable, might be unreasonable if paid to a large stockholder, because bonus incentive would presumably not be needed to call forth the stockholder's best efforts. Irby Construction Co. v. United States, 290 F.2d 824, 827, 154 Ct.Cl. 342, 347 (1961). Of course, what constitutes reasonable allowances (for which deductions from plaintiff's taxable income are to be allowed under section 162(a)(1) of the Internal Revenue Code of 1954) for salaries and other compensation paid to the three officers for personal services actually rendered, depends upon all of the facts and circumstances in this case, without any one factor controlling.

Since Paul C. Jones is the key figure in the plaintiff's management, consideration will first be given to the reasonableness of the amounts of $68,778.03, $58,627.08, and $48,370.93 which the plaintiff paid to him as compensation for the fiscal years 1959, 1960, and 1961, respectively. As stated earlier in this opinion, the reasonableness of compensation in a tax case of this type is a question of fact. While there is no definite formula by which the question of the reasonableness, for income tax purposes, of compensation in any particular instance can be determined (Irby Construction Co. v. United States, 290 F.2d 824, 826, 154 Ct.Cl. 342, 346 (1961)), there are several factors which the courts regard as pertinent to such an inquiry. Perhaps the most significant factor in passing upon the reasonableness of compensation in a tax case is a comparison between the compensation that is under consideration and the prevailing rates of compensation paid to the holders of comparable positions by comparable companies within the same industry. R.J. Reynolds Tobacco Co. v. United States, 149 F. Supp. 889, 138 Ct.Cl. 1, 14 (1957), cert. den., 355 U.S. 893, 78 S.Ct. 266, 2 L.Ed.2d 191 (1957); Patton v. Commissioner of Internal Revenue, 168 F.2d 28, 31 (6th Cir. 1948).

However, the bonus payments to the non-stockholding employees averaged only 4 percent of their salary. From the entire record, it appears that the bonus payments to plaintiff's officers were more in the nature of dividends than payments for services rendered, even though plaintiff's officers repeatedly asserted at the trial that stockholding was never used by the Board of Directors as a basis for fixing a bonus. In Irby Construction Co. v. United States, 290 F.2d 824, 154 Ct.Cl. 342 (1961), this court pointed out that even a payment that is reasonable is not deductible if it was actually a distribution of earnings as contrasted with compensation for services rendered, and that a bonus-type contract which is reasonable with a non-stockholder employee may be unreasonable if made with a large stockholder, since the incentive of the bonus would presumably not be needed to call forth the stockholder's best efforts. The record is virtually barren, moreover, of evidence of services performed by and salaries paid to other individuals in the same or a comparable business.

* * *" Whether compensation paid to officers and employees was reasonable is a factual question which must be resolved anew in each case (Irby Constr. Co. v. United States, 290 F.2d 824, 154 Ct.Cl. 342; Gordy Tire Co. v. United States, 296 F.2d 476, 155 Ct.Cl. 759. Since the members of the Boyd family were the sole stockholders in plaintiff corporation, compensation paid to the family should be subject to close scrutiny in order to insure that salaries and bonuses are not being used as a vehicle for siphoning off otherwise taxable corporate profits.

The question of the reasonableness of a salary paid to an employee is a question of fact which must be determined by reference to all of the facts in a particular case. Thus, we have said in Irby Construction Co. v. United States, 290 F.2d 824, 826, 154 Ct.Cl. 342, 346 (1961): "There is no definite formula by which the question of the reasonableness of compensation in any particular instance can be determined. It is a question of fact which must be resolved anew in each case. Stiening v. Commissioner, 3 Cir., 1945, 147 F.2d 204. Yet no one fact can be considered controlling to the exclusion of all others. Ticket Office Equipment Co. v. Commissioner, 1953, 20 T.C. 272, affirmed, 2 Cir., 1954, 213 F.2d 318. Each situation must be examined as a whole.