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petitioner would be entitled to deduct up to $328,160 as total
reasonable compensation.
Petitioner argues that it paid Mr. Leonard inadequate
compensation for its first 9 years of existence. After consulting
with qualified tax advisers, it decided to pay Mr. Leonard
$1,777,800 in salary and bonus in 1987 as compensation for the
significant services he had provided over the years. Petitioner
contends that Mr. Leonard’s exceptional service to petitioner
justifies the amount paid.
Bearing in mind the parties’ arguments, we shall analyze and
apply the factors enunciated by the U.S. Court of Appeals for the
Ninth Circuit in order to determine reasonable compensation for Mr.
Leonard.
(1) Role in Company
The first factor focuses on the compensated employee's
importance to the success of the business. Pertinent considerations
include the employee's position, hours worked, duties performed, and
the general importance of the employee to the company. American
Foundry v. Commissioner, 536 F.2d 289, 291-292 (9th Cir. 1976),
affg. in part and revg. in part 59 T.C. 231 (1972). Where a large
salary increase is at issue (such as here), it is useful to compare
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