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1. The Employee's Role in the Company: The Employee's
Position, Hours Worked, and Duties Performed, Plus Any
Special Duties or Role
From the perspective of an independent investor, we consider
whether the employee's role in the taxpaying company, including
the employee's position, hours worked, and duties performed, plus
any special duties or role (such as personally guaranteeing
corporate loans), justify the compensation paid. See Rapco, Inc.
v. Commissioner, supra at 954.
a. Isidore Klein’s Role
Isidore Klein founded petitioner, built it into a profitable
business, and was a prolific inventor. However, Isidore Klein
was less actively involved in petitioner’s operations in 1993 and
1994 than he had been in earlier years. Isidore Klein had no
dealings with petitioner’s exclusive sales representative in
Florida in 1993 and 1994. Isidore Klein did not manage
petitioner day to day after 1980 as he had before he moved to
Florida. Isidore Klein spoke frequently on the phone to Steven
Klein and approved the major decisions, but day-to-day
responsibility had shifted to Steven Klein. We think an
independent investor would have objected to an increase in
Isidore Klein’s salary from 8 percent of gross sales in 1992 to
10 percent of gross sales in 1993 and 1994.
Petitioner contends that part of Isidore Klein’s
compensation in 1993 and 1994 was catchup pay for years in which
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