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As previously discussed, Mr. Wechsler was paid large bonuses
even in petitioner’s down and loss years. Contrary to the claims
of petitioner’s experts, no strong linkage existed between the
bonuses and total compensation paid to Mr. Wechsler for a given
year and petitioner’s financial performance for that year.
Neither petitioner nor its experts established any consistent
method for calculating Mr. Wechsler’s bonuses for the years in
issue.12 See Rapco, Inc. v. Commissioner, supra at 955.
With respect to Mrs. Wechsler’s compensation for
petitioner’s 1999 fiscal year, she started working for petitioner
that year and also served as petitioner’s secretary and a member
of its board. Petitioner paid her a $178,154 salary and a
$308,000 bonus for that year. Petitioner’s 1999 fiscal year
FOCUS report reflects negative earnings before Federal income tax
(EBFIT) of $15,768,385 and substantial declines in retained
12 As discussed infra, some of petitioner’s other employees
received bonuses for petitioner’s 1999 fiscal year--a bad year
for petitioner. We have no reason to question the arm’s-length
nature and reasonableness of the 1999 bonuses paid to those
employees who (unlike Mrs. Wechsler) were unrelated to Mr.
Wechsler. We believe, however, that the method used to
compensate Mr. Wechsler should differ materially from the method
used to compensate petitioner’s other employees, in light of the
crucial importance of Mr. Wechsler’s services to petitioner and
petitioner’s business. We think an independent investor, to
secure Mr. Wechsler’s services in an arm’s-length arrangement, on
the one hand, would have to provide a method whereby Mr. Wechsler
potentially could earn much higher annual pay from petitioner
than petitioner’s other employees. Such a method for reasonably
compensating Mr. Wechsler, on the other hand, would also closely
tie his annual bonuses to petitioner’s earnings and profitability
in a given year.
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