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Petitioner's approach to compensation leaned heavily on
commissions as a motivational tool for all of its employees.
Its commission structure for all of its employees was
considerably more generous than the industry standard. Herold's
approach to determining his own compensation structure was
consistent with that overall approach. We think it is
significant that Herold consistently designed his compensation
structure by the end of the first quarter each year and
memorialized the bonus structure in board minutes. This was done
well before Herold could know what the actual outcome for the
year would be. With one minor deviation that we do not consider
significant,3 petitioner lived by this structure. When he failed
to "make his numbers", he did not get his maximum bonus. He was
never paid any additional bonus beyond the maximum he had
committed petitioner to earlier in the year.
9. Compensation Paid in Previous Years
An employer may deduct compensation paid to an employee in a
year although the employee performed the services in a prior
year. Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 119 (1930); see
also R.J. Nicoll Co. v. Commissioner, 59 T.C. 37, 50-51 (1972),
3 In 1 year, after-the-fact developments caused the maximum
sales target to be missed by a relatively small amount. By then
Herold had been paid the maximum bonus, which was appropriate
according to the information available when the payment was made.
As it later turned out, he was overpaid by $100,000. Looking at
Herold's overall track record and the vital role he played in
petitioner's continuing success, we do not believe independent
investors would have pressed Herold to repay this overage. We
note, for example, that Herold was not paid a bonus during
petitioner's lean years.
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