- 32 -
question): “Would a hypothetical independent investor consider
the factor favorably to require the payment of the bonuses to the
employee in order to retain the services which the employee
performed during the subject years?” An answer in the negative
indicates that the payment of a bonus was not sufficiently tied
to the employee’s services to constitute personal service income
but was more likely a distribution of earnings. An answer in the
affirmative supports deducting the bonuses as personal service
compensation. The reasonableness of the amount of the employee’s
compensation (inclusive of the bonuses) then hinges on whether
the hypothetical independent investor, after taking into account
the amount of the compensation, would receive at least the
minimum return anticipated on an investment in the employer.
a. Employee’s Qualifications
We analyze the qualifications of Emile and Louise. Each has
worked in petitioner’s business since its inception, and each
understands petitioner’s operation well. Petitioner’s
profitability during the subject years, however, did not rest
upon the personal qualifications of Emile or Louise but rested
more appropriately upon the volume of its sales, which, in turn,
hinged on the price at which petitioner sold its gasoline and
home heating oil. In the particular industry of which petitioner
was a part, the marginal skills of Emile and Louise were not
critical to petitioner’s profitability. Neither Emile’s nor
Page: Previous 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 NextLast modified: May 25, 2011