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of $300,000 in 1993 and $300,000 in 1994 was unreasonable. Due
to Steven Klein’s assumption of more responsibilities when he
became CEO in 1995 and based on Hakala’s estimate of reasonable
compensation to Steven Klein for 1995, we conclude that
compensation up to $440,000 in 1995 was reasonable. These
amounts for Steven Klein for 1993 and 1994 are based on Dorf’s
data but without any additional amounts added for research and
development work previously done by Isidore Klein, and with an
adjustment for hours worked. Our amount for Steven Klein for
1995 ($440,000) is essentially the same as believed reasonable by
Hakala ($439,284). Dorf did not provide data for 1995; Hakala’s
data is a suitable substitute.
D. Whether Petitioner Is Liable for the Penalty Under Section
6662 for Substantial Understatement
Respondent determined that petitioner is liable for the
accuracy-related penalty for substantial understatement for 1993,
1994, and 1995 under section 6662.
Taxpayers are liable for a penalty equal to 20 percent of
the part of the underpayment attributable to negligence or
substantial understatement of tax. See sec. 6662(a), (b)(1) and
(2). A substantial understatement of income tax occurs when the
amount of the understatement for a taxable year exceeds the
greater of 10 percent of the tax required to be shown on the
return or $10,000 in the case of a corporation. See sec.
6662(d)(1)(A).
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