"and then write that 'compensated' time off as an expense"

That's fine as long as they also picked it up as income elsewhere on the return ------------------------ which I'm guessing they didn't.  It's a left pocket to the right pocket deal.  If they take a deduction for their time on one business, they need to pick it up as income on another business.  However, they can't just magically take a deduction on their return for their own time.