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Under certain circumstances, prior services may be
compensated in a later year. Lucas v. Ox Fibre Brush Co., 281
U.S. 115, 119 (1930); Estate of Wallace v. Commissioner, supra at
553. However, in such instances, the taxpayer must establish
that there was not sufficient compensation in the prior periods
and that, in fact, the current year’s compensation was to
compensate for that underpayment. Estate of Wallace v.
Commissioner, supra at 553-554. In the year in issue, Richard,
Sr.’s salary was within the range of those of similarly situated
executives, and witnesses testified that Richard, Sr. had been
paid significantly less than similarly situated executives in
other years. Petitioner has established that Richard, Sr. was
undercompensated in prior years in order to meet specified
bonding requirements, a business necessity. The testimony also
supports an inference, and we conclude, that the bonus paid in
the year in issue was intended to compensate for the established
undercompensation in the earlier years. The entire deduction for
compensation was therefore reasonable.
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.
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Last modified: May 25, 2011