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Between November 1984 and January 1985, Dunkin and Edward
Fryer from the accounting firm (accountants) met with Atkinson to
provide tax advice with regard to petitioner’s taxable year
ending March 31, 1985, and growing profitability. At that
meeting, Atkinson informed the accountants that during
petitioner’s board of directors meeting on April 4, 1983, the
board of directors established Atkinson’s compensation package
for petitioner’s taxable year ending March 31, 1984, and
subsequent taxable years.5 In response, the accountants
explained to Atkinson that petitioner’s compensation deductions
for Atkinson’s salary and bonuses had to be justified and
memorialized. The accountants advised Atkinson that to
demonstrate reasonable compensation for tax purposes, petitioner
should establish a formula based on the profitability of the
company to determine Atkinson’s salary and bonuses. The
accountants also suggested to Atkinson that petitioner maintain
minutes for its board of directors meetings.
Following the accountants’ advice, petitioner established a
formula to determine Atkinson’s compensation and created and
maintained minutes for petitioner’s board of directors meetings.
The minutes for the board of directors meetings for March 30,
5 Petitioner’s board of directors consisted of the
Atkinsons and a third party. On June 29, 1984, the board of
directors was reduced to two directors consisting of only the
Atkinsons.
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