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Table 3
Claimed compensation
Claimed as % of taxable income
Claimed compensation as before deduction of
Year compensation % of gross sales Jack’s compensation
1986 $24,195 1.0 39.9
1987 79,413 2.6 80.0
1988 164,292 4.6 91.2
1989 84,581 2.5 127.5
1990 175,164 5.0 101.0
1991 129,828 4.5 105.7
1992 25,174 0.9 17.5
1993 25,818 0.6 7.1
1994 398,638 6.1 80.3
1995 762,186 8.5 82.0
1996 863,559 8.7 85.1
In 1995, petitioner paid $62,186 in salary to Jack over the
course of the year. On December 31, 1995, petitioner paid an
additional $700,000 to him as a bonus. In 1996, petitioner paid
$63,559 in salary to Jack over the course of the year. On
December 31, 1996, petitioner paid an additional $800,000 to him
as a bonus. Jack determined the amount of his bonus each year
after he and J. Michael Sledge (hereinafter sometimes referred to
as Sledge) examined petitioner’s financial situation. Sledge, a
certified public accountant, has been petitioner’s accountant
since its incorporation and Jack’s accountant since 1975. Sledge
prepared petitioner’s tax returns for both of the years in issue,
and signed those tax returns as paid preparer. He represented
petitioner and Jack during the audit stage that led to the
instant case. He met with Jack at least quarterly every year to
review the financial performance of the company and another 20-30
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