-26-
Commissioner, supra at 1326 (in deciding the reasonableness of
compensation, a court may consider the absence of dividends if a
profitable corporation has offered no reasons for its failure to
pay dividends).
This factor favors respondent.
8. Whether Employee and Employer Dealt at Arm's Length
The failure of the employee and employer to deal at arm's
length, such as if the employee is the employer's sole or
controlling shareholder, suggests that the amount of compensation
paid may be unreasonable. Elliotts, Inc. v. Commissioner, 716
F.2d at 1246; Owensby & Kritikos, Inc. v. Commissioner, supra at
1322-1324. We closely scrutinize compensation if the employee
controls the employer to see whether it is something other than
the purchase price of the employee's services. Charles Schneider
& Co. v. Commissioner, 500 F.2d at 152; see also Dielectric
Matls. Co. v. Commissioner, 57 T.C. 587, 591 (1972).
Eberl has been petitioner's sole shareholder and president
at all times since he founded petitioner. He set his own salary
and bonus. Eberl and petitioner did not deal at arm's length.
See Estate of Wallace v. Commissioner, 95 T.C. 525, 555 (1990),
affd. 965 F.2d 1038 (11th Cir. 1992); cf. Mayson Manufacturing
Co. v. Commissioner, 178 F.2d at 121 (bonus plan established by
board of directors for minority shareholders was an arm's-length
transaction).
This factor favors respondent.
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