- 5 -
of $38,886.7 One component of the $113,369 expense for supplies
was evidenced by a check for $80,000 that was made payable to
VVI. The $80,000 check was signed by Mr. Reeves and bore the
notation “asset purchase UG”.8
Petitioner’s rate of return on equity was 42 percent for FYE
May 31, 1996.9 Petitioner did not pay any dividends in FYE May
31, 1996.
Petitioner did not maintain a compensation policy for Mr.
Reeves or its employees. The bonus Mr. Reeves received was not
based upon a formula or previously set forth in writing. Each
bonus was determined and paid at the end of the fiscal year when
petitioner could ascertain its cash available.
7 Respondent disallowed all but $100,000 of the $509,000
deduction petitioner claimed for officer’s compensation paid to
Mr. Reeves.
Net income book value was reported on petitioner’s Form 1120
Schedule M-1. Net income book value was computed by subtracting
from taxable income of $62,379, $21,209 of Federal income tax and
$2,284 comprising Federal and State underpayment penalties,
accrued related party compensation, and a travel and
entertainment expense recorded on the books but not deducted on
the return.
8 Respondent disallowed the $80,000 expense deduction but
allowed petitioner to depreciate the $80,000 over a 39-year
recovery period under the modified accelerated cost recovery
system. The allowed depreciation deduction was $2,051.
9 Rate of return on equity is computed by dividing
petitioner’s net income book value of $38,886 by its equity value
of $92,928.
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Last modified: November 10, 2007