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compensation formula from 8 percent to 10 percent of sales in
view of his lessened contribution to petitioner in 1993 and 1994
and petitioner’s financial performance compared to earlier years.
We conclude that an independent investor would consider
compensation paid to Isidore Klein of $200,000 in 1993 and
$200,000 in 1994 to be reasonable. These amounts are based in
part on Dorf’s data. However, they are less than the amounts
Dorf said might be reasonable, for reasons stated above where we
discussed Dorf’s analysis. As discussed at paragraph II-B-3-a,
above, we estimate that Isidore Klein worked at most two-thirds
of the time in 1993 and 1994. Under the circumstances, we think
paying Isidore Klein more than $200,000, which equaled 5 to 6
percent of sales (about two-thirds of his customary 8 percent of
sales) was unreasonable.
2. Steven Klein
We conclude that an independent investor would not have
approved Steven Klein’s compensation based on petitioner’s
performance in those years. We do not think an independent
investor would believe that Steven Klein should be paid, in 1
year (1995), more than the cumulative amount petitioner earned in
the previous 10 years (1986-95). See H&A Intl. Jewelry, Ltd. v.
Commissioner, T.C. Memo. 1997-467 (compensation paid to president
of corporation was held unreasonable because he was paid more in
1 year than the company earned in the prior 8 years).
We conclude that compensation paid to Steven Klein in excess
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