-13-
34 percent ($1,680,000 divided by $4,922,631), which was
appropriate in light of Mr. Leonard's work history and
undercompensation in 1985 and 1986. However, during the year in
issue, Mr. Leonard was attempting to wind down the business.
Fourth, because Mr. Leonard indirectly owned all of
petitioner's stock, a potential for conflict of interest clearly
existed. Thus, we carefully scrutinized the reasonableness of the
compensation paid to him. See Owensby & Kritikos, Inc. v.
Commissioner, supra at 1322-1324; see also Nor-Cal Adjusters v.
Commissioner, 503 F.2d 359, 361 (9th Cir. 1974), affg. T.C. Memo.
1971-200. Mr. Leonard's compensation was bonus-heavy and salary-
light, which could have suggested masked dividends. See RAPCO,
Inc. v. Commissioner, 85 F.3d at 955. Although petitioner paid
dividends to RLLH4 in prior years, it did not pay any dividends in
1987. But petitioner's rate of return for 1987 (175 percent) would
have satisfied a hypothetical investor.
Fifth, petitioner did not determine Mr. Leonard's bonus on the
basis of any consistently applied formula or plan. The amount of
4 Petitioner paid RLLH a Can$743,828 dividend in 1983,
and an Can$878,787 dividend in January 1985 out of petitioner's
capital account. Under Canadian law at the time, when a dividend
was paid out of a capital account, the distribution was not
taxable because it represented the nontaxable portion of capital
gain.
William T. Perks, a Canadian chartered accountant and
attorney, advised petitioner and Mr. Leonard with regard to tax
and legal matters. Before Apr. 18, 1985 (when petitioner became
a U.S. corporation), it appears that it was financially
advantageous for petitioner to declare dividends under Canadian
law.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Next
Last modified: May 25, 2011