Frank Petar Contracting, Inc. - Page 3

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          and tax purposes on the basis of a fiscal year ending May 31                
          using the accrual method of accounting.                                     
               Sometime in the middle of May 1990, Messrs. Cunniff and                
          Petar met for the purpose of reviewing petitioner’s results for             
          the taxable year.  At this meeting it was decided that petitioner           
          would award Mr. Petar a bonus of $100,000 in consideration of his           
          extraordinary efforts and the company’s favorable performance for           
          the year.  The bonus was accrued on petitioner’s books for FYE              
          5/31/90.  For cash-flow reasons Mr. Petar wanted to postpone                
          actual payment until some time in the next fiscal year.  Mr.                
          Cunniff advised him that in order for petitioner to claim a                 
          deduction for the accrued bonus for FYE 5/31/90, payment would              
          have to be made by August 15, 2-1/2 months following the close of           
          the taxable year.  In accordance with its accountant’s advice,              
          petitioner issued Mr. Petar a check for $100,000 on August 14,              
          1990.  In prior years bonuses had always either been paid in cash           
          by the end of the fiscal year or accrued and paid in cash within            
          2-1/2 months of the fiscal yearend.  In no prior year in which              
          actual payment of a bonus was deferred had petitioner issued a              
          note evidencing the accrued liability.                                      
               On its Federal income tax return (Form 1120) for FYE                   
          5/31/90, petitioner claimed a deduction for compensation of                 
          officers in the total amount of $169,800, which included the                
          $100,000 bonus awarded to Mr. Petar.  Mr. Petar reported the                





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