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When shareholder-officers who control the corporation set their
own compensation, careful scrutiny is necessary to determine
whether the alleged compensation is in fact a distribution of
profits and a constructive dividend. Home Interiors & Gifts,
Inc. v. Commissioner, 73 T.C. 1142, 1156 (1980).
II. The Elliotts Factors Applied to Petitioner’s Compensation of
Mr. Reeves
A. Role in the Company
The role the employee plays in the company focuses on the
employee’s importance to the success of the business. Pertinent
considerations include the employee’s position, hours worked, and
duties performed. Elliotts, Inc. v. Commissioner, supra at 1245.
From petitioner’s incorporation in 1979, Mr. Reeves’s hard
work and vision were critical and indispensable to petitioner’s
business and the primary reason for its overall success. He
served as petitioner’s president from its incorporation in 1979
and its secretary and treasurer from 1986. Mr. Reeves also
handled all of petitioner’s managerial duties. On a daily basis
he managed petitioner’s research, development, production, sales,
and marketing and advertising (until UMI was spun off on June 1,
1995). Mr. Reeves also supervised petitioner’s employees15 and
was responsible for all hiring and firing.
15 Mr. Reeves testified that petitioner had approximately 25
employees during the fiscal years at issue.
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