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h. Employer’s Salary Policy as to All Employees
We analyze petitioner’s salary policy as to all of its
employees. The record establishes that both Emile and Louise
were compensated differently than the other employees, most
likely because of Louise’s status as the controlling shareholder.
Apart from Emile, Louise, and, in 1990, Haff, none of
petitioner’s employees received a large bonus for any subject
year. Nor does the record indicate that any of petitioner’s
other employees, except for Haff, the president, CEO, and general
manager of the company, received six-figure compensation in any
one year. We also note that Emile and Louise, by virtue of their
positions as corporate officers and directors, and by virtue of
Louise’s relationship to the company as its controlling
shareholder, were not dealing with petitioner at arm’s length.
As to both Emile and Louise, we answer the question in the
negative.
i. Compensation Paid in Prior Years
We analyze the compensation that petitioner paid to Emile
and Louise in years prior to the subject years. An employer may
deduct compensation paid to an employee in a year although the
employee performed the services in a previous year. Lucas v. Ox
Fibre Brush Co., 281 U.S. at 119; see also R. J. Nicoll Co. v.
Commissioner, 59 T.C. 37, 50-51 (1972) (and the cases cited
thereat). In order to do so, the employer must show: (1) That
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