Law Offices--Richard Ashare, P.C. - Page 8




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               Respondent audited petitioner's 1990 through 1992 taxable              
          years.  In connection therewith, petitioner agreed with                     
          respondent in December 1993 that some of the compensation paid to           
          Mr. Ashare during the related years was constructive dividends;             
          petitioner has never formally declared or paid a dividend.  The             
          amounts recharacterized to dividends are as follows:                        
          Year     Reported compensation Agreed compensation  Constructive dividends  
          1989            $2,151,666        $2,151,666                 -0-            
          1990             1,690,834         1,563,447              $126,553          
          1991             2,000,000         1,947,045                52,958          
          1992             4,650,000         4,602,596                47,404          
          Following the audit, petitioner carried its 1993 loss back to               
          1990.                                                                       
               During the relevant years, petitioner's board did not                  
          convene as a board in person.  Every December, the board would              
          transact its business for that year through one or more telephone           
          conversations between Messrs. Bess and Ashare.  Board action was            
          reflected in written resolutions signed by all three board                  
          members who, contemporaneously therewith, consented under State             
          law for the board to act without an actual meeting.  Board action           
          included setting each employee's compensation for that year in              
          accordance with petitioner's unwritten compensation policy.                 
               In accordance with petitioner's compensation policy, Mr.               
          Bess telephones petitioner's accountant2 every December, and the            

               2 Petitioner's accountant during the relevant years was                
                                                             (continued...)           





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