Leonard Pipeline Contractors, Ltd. - Page 13

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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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