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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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