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Between 1978 and 1987, petitioner had gross revenues of
$123,124,905 and after-tax net income of $1,705,958. Petitioner's
primary source of income in 1985 and 1986 arose from its work on
the All American Pipeline project,2 which involved coating,
insulating, and wrapping 325 miles of pipeline in Texas, Arizona,
and California. In connection with this project, Mr. Leonard
personally guaranteed petitioner's $1.5 million debt to the Royal
Bank of Canada. The All American Pipeline project was finished in
1987; thereafter petitioner continued to receive payments on the
contract but undertook no new business.
In February 1987, Mr. Leonard began contemplating retirement.
On September 28, 1987, 2 days before the end of petitioner's tax
year, petitioner's board of directors (consisting of Mr. Leonard
and his son) voted to pay Mr. Leonard a $1.68 million bonus in
addition to his $97,800 salary for the year. The board's decision
was purportedly based on several considerations, including: (1) Mr.
Leonard's efforts in obtaining the All American Pipeline project;
(2) Mr. Leonard's development of a new insulation process; and (3)
2 On Sept. 19, 1991, Mr. Leonard ultimately pled guilty
to a criminal information filed against him in the District Court
for the Southern District of Texas for obtaining the All American
Pipeline contract through fraud. He was sentenced to 3 years of
unsupervised probation and fined $1,000.
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