Labelgraphics, Inc. - Page 15

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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.              

          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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