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the application of those factors to the proposed bonus. Arthur
Andersen concluded that five factors supported the reasonableness
of the proposed bonus, one was undeterminable, and three
contradicted the reasonableness of the proposed bonus. Arthur
Andersen recommended that petitioner document (1) that part of the
bonus was payment for past services rendered to petitioner, and (2)
the reasons why prior years’ compensation levels were inadequate.
Board Approval of the Bonus
Petitioner's board of directors consisted of Mr. Leonard and
his son. On September 28, 1987, petitioner’s board of directors
held a special meeting to discuss the Arthur Andersen analysis and
to determine the appropriate bonus to be paid to Mr. Leonard. The
board understood that petitioner could deduct the bonus as an
expense under U.S. tax law. The board considered Mr. Leonard’s
service to petitioner and his prior compensation to determine the
amount of the bonus. The minutes of the board meeting (prepared by
Mr. Perks) state, in pertinent part, as follows:
1. The President, through his efforts as early as 1984
and resultant personal and business contacts acquired
from those efforts, was able to have the corporation
placed on the bidding list for All American Pipeline
Company.
2. The President[,] having acquired expertise in the
coating and insulation of pipe in Saudi Arabia during
1978 through to 1980[,] was able to develop a new
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