- -16
In 1991, Mr. Haviv's $601,077 compensation caused
petitioner's net income to plummet to one-eighth of its pre-
compensation amount. In 1992, petitioner had net income of
$470,991 before compensating Mr. Haviv. Payment of his $603,269
compensation (including his $535,000 yearend bonus) caused
petitioner to suffer a net operating loss of $132,278. We give
special attention to the fact that the loss in 1992, which was
caused by Mr. Haviv's bonus, was carried back to offset income
from 1989, 1990, and 1991. While this factor alone does not
control the result in this case, it weighs heavily against
petitioner's claim that Mr. Haviv's compensation was reasonable.
Prevailing Economic Conditions
Courts will examine whether the success of a business is
attributable to prevailing economic conditions, as opposed to the
efforts and business acumen of the employees. Prevailing
economic conditions may affect a business' performance and
indicate the extent, if any, of the employees' effect on the
company. Mayson Manufacturing Co. v. Commissioner, supra at 119-
120. Adverse economic conditions, for example, tend to show that
an employee's skill was important to a company that grew during
hard times.
Petitioner asserts that both a general recession and an
industry-specific recession induced by the luxury tax forced Mr.
Haviv to work harder to increase gross sales by approximately
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