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Elliotts, the Court of Appeals found that a 20-percent average
rate of return on equity would satisfy a hypothetical independent
investor. Elliotts, Inc. v. Commissioner, supra at 1247.
However, because petitioner was thinly capitalized with $487 in
cash, and used equipment with a total fair market value of
$53,555, this factor is given little weight.
E. Internal Consistency in Compensation
This factor focuses on whether the compensation in question
was paid pursuant to a structured, formal, and consistently
applied program. Id. Bonuses not paid pursuant to such a
program are suspect. Id. Bonuses paid to employees are
deductible ”when * * * made in good faith and as additional
compensation for the services actually rendered by the employees,
provided such payments, when added to the stipulated salaries, do
not exceed a reasonable compensation for the services rendered.”
Sec. 1.162-9, Income Tax Regs.
Petitioner did not maintain a compensation policy for its
officers and employees, and Mr. Reeves’s bonus of $500,000 was
not awarded under a structured, formal, or consistently applied
program. Rather, the bonus was determined and paid at the end of
the fiscal year when petitioner could ascertain its cash
available.
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