- 54 -
shareholder had a definite conflict of interest).11 This factor
strongly supports respondent.
E. Internal Consistency in Compensation
This factor focuses on whether the compensation was paid
pursuant to a structured, formal, and consistently applied
program. Bonuses not paid pursuant to such plans are suspect.
Similarly, bonuses paid to controlling shareholders are also
suspect “if, when compared to salaries paid non-owner management,
they indicate that the level of compensation is a function of
ownership, not corporate management responsibility.” Elliotts,
Inc. v. Commissioner, 716 F.2d at 1247; see also Rapco, Inc. v.
Commissioner, 85 F.3d at 954.
11 On brief, petitioner argues that Mr. Wechsler’s
compensation for most of the years in issue should be considered
reasonable because three other unrelated shareholders in
petitioner--Mr. Glickman, Mr. Zeeman, and Mr. Solomon--
purportedly approved that compensation. Petitioner’s reliance
upon Mr. Glickman’s, Mr. Zeeman’s and Mr. Solomon’s alleged
approval of the compensation petitioner paid Mr. Wechsler,
however, is misplaced. Mr. Wechsler was petitioner’s controlling
shareholder and owned a majority of its common shares sufficient
to elect a majority of petitioner’s directors. In contrast, Mr.
Glickman, Mr. Zeeman, and Mr. Solomon (who were also full-time
employees and officers of petitioner) owned small minority stock
interests in petitioner. Their continued employment was subject
to Mr. Wechsler’s authority. Mr. Glickman, Mr. Zeeman, and Mr.
Solomon thus cannot substitute for the inactive, hypothetical
independent investor under the independent investor test adopted
by the Court of Appeals for the Second Circuit and other courts.
See Rapco, Inc. v. Commissioner, 85 F.3d 950, 954-955 (2d Cir.
1996), affg. T.C. Memo. 1995-128; Elliotts, Inc. v. Commissioner,
716 F.2d 1241, 1245, 1247 (9th Cir. 1983), revg. T.C. Memo. 1980-
282; Haffner’s Serv. Stations, Inc. v. Commissioner, T.C. Memo.
2002-38, affd. 326 F.3d 1 (1st Cir. 2003).
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