- 42 -
services for which petitioner intended to compensate him, rather
than entirely for its fiscal year ended February 28, 1990, its
net profit for each of its fiscal years ended February 29, 1988,
and February 28, 1989, would have decreased, and its net profit
for its fiscal year ended February 28, 1990, would have increased
by an amount correlating to the total amount of the decreases in
net profit for those other two years, thereby also changing the
pattern of declining profits on which respondent relies.24
Conflict of Interest
The fourth category of factors identified by the Court of
Appeals concerns whether some relationship exists between the
company and the employee whose compensation is at issue that
might permit the company to disguise nondeductible corporate
distributions of income as compensation deductible under section
162(a)(1). Elliotts, Inc. v. Commissioner, 716 F.2d at 1246.
Such a relationship exists in the instant case. Mr. Ruf was
petitioner's sole shareholder during the relevant period.
Situations in which an employee is the sole or controlling
shareholder warrant close scrutiny. See id. "The mere existence
of such a relationship, however, when coupled with an absence of
dividend payments, does not necessarily lead to the conclusion
24 We also note that if we were to determine that any of the
$2,600,000 of compensation petitioner expensed in its financial
statement for its fiscal year ended Feb. 28, 1990, did not con-
stitute reasonable compensation for that year or any other year,
petitioner's net profit for that year would have increased.
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