Lumber City Corporation, f.k.a. Neiman-Reed Lumber and Supply Company, Inc. - Page 22

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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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