- 59 -
Petitioner contends that parts of the payments to Dennis and
Curtis were for services rendered in prior years. Petitioner
relies on its expert to establish the amount of past
undercompensation. We have rejected Mr. Reilly's calculation of
undercompensation paid to Dennis and Curtis from 1986 to 1996.
We find that any undercompensation that may have occurred in
earlier years was rectified prior to the years at issue. The
record does not indicate that the compensation paid to Dennis and
Curtis in 1995 and 1996 was attributable to services performed
for petitioner in earlier years.
This fact further indicates that part of the bonus was a
distribution of profits and not compensation for services.
8. Comparison of Salaries Paid With Gross Income and Net
Income
Courts have compared compensation to gross and net income in
deciding whether compensation is reasonable. See Owensby &
Kritikos, Inc. v. Commissioner, 819 F.2d at 1322-1323; Mayson
Manufacturing Co. v. Commissioner, 178 F.2d 115 (6th Cir. 1949).
In most cases, considering compensation as a percentage of net
income is more probative than considering compensation as a
percentage of gross receipts because compensation as a percentage
of net income more accurately gauges whether a corporation is
disguising the distribution of dividends as compensation. See
Owensby & Kritikos, Inc. v. Commissioner, supra at 1325-1326.
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