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Mr. Martin's stock interest had a fair market value of $9,250,000
as of October 25, 1991.
On January 1, 1992, Mr. Martin sold all of his stock in
petitioner to Mike.
From its incorporation in June 1980 through January 1, 1992,
petitioner declared and paid no formal dividends.
In the notice of deficiency issued to petitioner,
respondent, among other things, disallowed petitioner's deduction
of a $633,313 portion of its total compensation to Mr. Martin for
its year ended June 30, 1990. The notice of deficiency stated,
in pertinent part:
the compensation of officer/shareholder Lon Martin
claimed in the amount of $878,913.00 is overstated
$633,313.00. It has not been established that an
amount greater * * * [than] $245,600 is reasonable
compensation for services provided by Lon Martin during
the taxable year. Further, it has not been established
that any amount represents payments for prior years in
which Lon Martin may have been undercompensated.
Accordingly, taxable income is increased $613,313.00
for the taxable year ended 6-30-90.
Respondent further determined that petitioner was liable for a
penalty under section 6662(a) and (b)(2) with respect to the
underpayment from the disallowed compensation deduction to Mr.
Martin.
OPINION
Issue 1. Reasonable Compensation
Section 162(a)(1) allows as a business deduction "a
reasonable allowance for salaries or other compensation for
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