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times a year on an ad hoc basis. He has attended most of the
meetings of petitioner’s board of directors since 1977.
In determining the amount of a bonus for Jack, Jack and
Sledge considered petitioner’s profit situation and the amount of
retained earnings necessary to satisfy an investor in petitioner.
Jack discussed with Sledge the possibility that the amounts of
the 1995 and 1996 bonuses might be viewed as “unreasonable
compensation in eyes of the Commissioner” of Internal Revenue.
Jack was aware that there were risks involved with petitioner’s
payment of the bonuses on the last day of the year.
Petitioner’s corporate board minutes for 1995 and 1996 do
not reflect any intent to increase Jack’s compensation in those
years to make up for Jack’s earlier years’ undercompensated
services.
E. Distribution and Dividend History
Petitioner distributed $116,100 in 1993, as an S
corporation. Petitioner distributed $320,949 dividends in 1994,
as a C corporation. This was done in accordance with Sledge’s
recommendation. The 1993 and 1994 distributions are the only
ones petitioner ever made, through the end of 1996. Petitioner
did not have any agreements with any banks or financial
institutions with which it dealt that prohibited it from
declaring dividends for the years in issue.
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