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its salespeople was between 1.5 and 4 percent of sales. In 1990,
the top salesperson for petitioner was Mr. Saldias, who earned
$337,182.59 in commissions for the calendar year 1990.
On July 31, 1990, Mr. Penalba loaned $689,454.42 to
petitioner, and Mrs. Penalba loaned $172,363.61 to petitioner.
Petitioner's income tax return for its fiscal year 1990 shows
that at the beginning of the year its loans from stockholders
were $822,941 and at the end of the year were $1,233,246. Mrs.
Penalba loaned substantial sums of money to petitioner over the
years in order to establish more working capital to enable
petitioner to receive further credit from suppliers and vendors.
On its income tax return for its fiscal year 1990,
petitioner claimed a deduction for compensation paid to Mr.
Penalba of $1,342,400 and for compensation paid to Mrs. Penalba
of $407,600. Respondent in her notice of deficiency determined
that reasonable compensation for petitioner's officers during its
fiscal year 1990 was $875,000 and disallowed as a deduction
$875,000 of the $1,750,000 claimed by petitioner on its income
tax return for officers' compensation for that year. Respondent
determined that reasonable compensation for Mr. Penalba for
petitioner's fiscal year 1990 was $671,200 and that reasonable
compensation for Mrs. Penalba was $203,800. Respondent also
determined that petitioner's closing inventory for its fiscal
year 1990 was undervalued by $379,819. At the trial, counsel for
respondent explained that part of the undervaluing of inventory
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