PMT, INC. - Page 34

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          production in Mr. Penalba's absence, she was seldom involved in             
          the day-to-day production operations.                                       
               It is clear from the record that Mr. Penalba was very                  
          involved in production, and that production was vital to                    
          petitioner's business.  Mr. Penalba was responsible for both                
          production and sales of the fabric.  Mr. Penalba not only                   
          developed the fabrics petitioner produced, but also supervised              
          the production of the fabrics from the factories with which                 
          petitioner had contracts.  While Mr. Penalba was intimately                 
          involved in production, he was also responsible for sales,                  
          including recruiting and training salesmen, customer service, and           
          frequently meeting with customers and the salesmen.                         
               Respondent has submitted that 75 percent of Mr. Penalba's              
          compensation is subject to the capitalization requirement of                
          section 263A, while 50 percent of Mrs. Penalba's compensation is            
          subject to section 263A.  It appears from the record that Mr.               
          Penalba's compensation was due substantially to his production              
          services for petitioner.  We have concluded that $400,000 was               
          reasonable compensation to Mr. Penalba in petitioner's fiscal               
          year 1990 for development of the cotton/Lycra fabric, which is              
          part of production.  Sec. 263A(g)(1).  Certainly, petitioner has            
          not shown that the compensation of Mr. Penalba was not primarily            
          for his production duties.  We hold that 75 percent of Mr.                  
          Penalba's compensation was for his production duties.                       






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