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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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