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In 2002, Mr. Reeves sold his residence in Newberg, Oregon,
as part of a bankruptcy sale. As part of the sale, petitioner
sold the floating structures to Mr. Reeves’s wife’s company,
Royal Sun Properties, L.L.C., for $100,000 with $55,000 paid as a
downpayment.12
Respondent issued the notice of deficiency on March 8, 2002.
Petitioner timely filed its amended petition on August 19, 2002.
OPINION
I. Reasonable Compensation
Petitioner contends the amounts paid to its sole executive
and shareholder, Mr. Reeves, in the fiscal years at issue
constituted reasonable compensation under section 162(a)(1).
Conversely, respondent contends Mr. Reeves’s compensation for the
fiscal years at issue was unreasonable but, on the basis of
respondent’s expert’s opinion, concedes deductions of $1 million
and $750,000,13 respectively.
12 Royal Sun Properties, L.L.C., still owes petitioner
$45,000.
13 The $750,000 includes reasonable compensation paid to Mr.
Reeves by petitioner and UMI together. Respondent argued on
brief that if the Court accepted $750,000 as reasonable
compensation for FYE June 30, 1996, it would be appropriate to
divide this amount between petitioner and UMI and allow
petitioner to deduct $499,012. Respondent alternatively argued
that it would be appropriate to allow UMI its full claimed
deduction of $509,000 if petitioner were allowed only $250,000 as
reasonable compensation for its FYE June 30, 1996.
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