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b. Ability To Disguise Dividends Paid to Steven Klein
as Compensation
Petitioner contends that Steven Klein’s salary was
reasonable in amount in 1993 and 1994 because he had an arm’s-
length relationship with his father, Isidore Klein, in those
years.
We closely scrutinize intrafamily transactions. See Seven
Canal Place Corp. v. Commissioner, 332 F.2d 899, 900 (2d Cir.
1964), remanding T.C. Memo. 1962-307; Estate of Van Anda v.
Commissioner, 12 T.C. 1158, 1162 (1949), affd. per curiam 192
F.2d 391 (2d Cir. 1951). Richard Schwaeber testified that,
although Isidore and Steven Klein negotiated Steven Klein’s
salary, Isidore Klein ultimately paid Steven Klein what Steven
wanted. There is no evidence that Isidore Klein tried to hire
someone to replace Steven Klein or to sell petitioner to a third
party or that Steven Klein ever sought another job. Steven
Klein’s impressive salary in 1993 and 1994 despite petitioner’s
unimpressive performance suggests that his compensation did not
result from arm’s-length negotiations and was not handled as an
independent investor would have handled it. These facts suggest
that the salary negotiations were not at arm’s length.
c. Yearend Bonuses
The large yearend payments to Isidore and Steven Klein
suggest that part of their compensation was disguised dividends.
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