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ceived and reviewed petitioner's financial statements and had
regular discussions with Mr. Ruf concerning petitioner. At no
time during those years did Mr. Neiman disapprove the compensa-
tion petitioner paid to Mr. Ruf. Although the original notes
initially restricted the amount of cash that Mr. Ruf was allowed
to withdraw from petitioner due to its poor cash position, Mr.
Neiman expected that Mr. Ruf would be justly compensated as soon
as the cash was available to do so.
Notice of Deficiency
In the notice of deficiency (notice), respondent allowed the
entire amount of $132,629 that petitioner deducted as compen-
sation paid to Mr. Ruf in its Federal income tax return for its
taxable year ended February 29, 1988, and disallowed $1,322,053,
$2,600,000, and $750,000 of the amounts that petitioner deducted
as compensation paid to Mr. Ruf in its Federal income tax returns
for its taxable years ended February 28, 1989, February 28, 1990,
and February 28, 1991, respectively. Respondent thus determined
that petitioner was entitled to deduct as compensation paid to
Mr. Ruf $132,629 for its taxable year ended February 29, 1988,
$132,693 for its taxable year ended February 28, 1989, and $0 for
its taxable years ended February 28, 1990, and February 28, 1991.
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