-14-
Mr. Leonard's bonus was not set according to any business
considerations; rather, it was meant to recoup from petitioner an
amount equal to the amount of money and property awarded to his
estranged wife in their divorce ($1.68 million). Indeed,
petitioner paid Mr. Leonard's wife $3,000 a month beginning at
least in February 1986 as part of Mr. Leonard's support obligation
during the pendency of their marriage dissolution action.
Interestingly, because Mrs. Leonard did not work for petitioner,
the amount paid to her would not have been deductible by petitioner
and would have been taxable to Mr. Leonard as a constructive
dividend.
Raising a salary (or in this case setting a bonus) towards the
end of the year has been held to be an indication that the salary,
or bonus, is really a distribution of earnings rather than
additional compensation. See, e.g., Rich Plan, Inc. v.
Commissioner, T.C. Memo. 1978-514. This is particularly true where
no dividends have been paid. We believed that because the board
(consisting of Mr. Leonard and his son) passed the resolution 2
days before the end of petitioner's fiscal year, and shortly before
Mr. Leonard's retirement, petitioner, to a certain extent, made a
deliberate effort to distribute its earnings to Mr. Leonard. On
the other hand, petitioner's 1987 compensation to Mr. Leonard did
partially represent an attempt to rectify his 1985 and 1986
undercompensation.
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