- 27 -
and the cases cited therein. In order to do so, the employer
must show: (1) That the employer intended to compensate the
employee for past undercompensation and (2) the amount of the
undercompensation. Pacific Grains, Inc. v. Commissioner,
399 F.2d 603, 606 (9th Cir. 1968), affg. T.C. Memo. 1967-7;
Estate of Wallace v. Commissioner, 95 T.C. at 553-554.
The record does not indicate that Herold's compensation
during the subject years was attributable to services which he
performed for petitioner in earlier years. In fact, Herold even
testified that none of his 1992 and 1993 compensation was redress
for earlier years.
10. Employer's Past and Present Financial Condition
Petitioner grew and became very profitable under Herold's
leadership. Its equity grew from $92,939 at the end of 1985 to
$598,928 at the end of 1993, an increase of 644 percent.
11. Whether Employer and Employee Dealt at Arm's Length
Where an employer and an employee are not dealing at arm's
length, the amount of compensation paid may be unreasonable.
Owensby & Kritikos, Inc. v. Commissioner, supra at 1324; see
Gilman Paper Co. v. Commissioner, 284 F.2d 697 (2d Cir. 1960),
affg. T.C. Memo. 1960-13.
As petitioner's sole shareholder and its only board member,
Herold controlled every detail of the process by which his
compensation was determined. Nevertheless, we are impressed by
the lengths Herold went to in order to develop objective
underpinnings for his bonus formula each year.
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