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must show: (1) That the employer intended to compensate the
employee for past undercompensation, and (2) the amount of the
undercompensation. Pacific Grains, Inc. v. Commissioner,
399 F.2d 603, 606 (9th Cir. 1968), affg. T.C. Memo. 1967-7;
Estate of Wallace v. Commissioner, 95 T.C. 525, 553-554 (1990),
affd. 965 F.2d 1038 (11th Cir. 1992).
Petitioner has met both of these requirements. Its board
found that, during the 2-year period ended July 31, 1984, the
Officers had not received $1,125,000 of the compensation provided
in their employment agreements. Its board decided that
petitioner would pay this liability during the year in issue.
During the 2 years prior to the year in issue petitioner
experienced cash-flow problems, particularly during its first
year of operation, and sought to preserve its cash. Petitioner
deferred the payment of some of the Officers' compensation until
the year in issue. This factor favors petitioner.
k. Employer's Past and Present Financial Condition
Petitioner grew and became very profitable. Its equity grew
from $63,903 on July 31, 1983, to $960,582 on July 31, 1985, an
increase of 1,403 percent. This factor favors petitioner.
l. Whether Employer and Employee Dealt at Arm's Length
Where an employer and an employee are not dealing at arm's
length, the amount of compensation paid may be unreasonable.
Owensby & Kritikos, Inc. v. Commissioner, supra at 1324; Elliotts
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