# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T.C. Memo. 1997-464

UNITED STATES TAX COURT

ALPHA MEDICAL, INC., f.k.a. ALPHA MEDICAL MANAGEMENT, INC.,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22802-94.

Filed October 14, 1997.

John P. Konvalinka and Thomas E. Smith, for petitioner.
Bonnie L. Cameron, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION
PARR, Judge:

Respondent determined a deficiency in

petitioner's 1990 Federal income tax of $1,376,520, and a penalty
under section 66621 of $275,304.

1

All section references are to the Internal Revenue Code
as in effect during the year in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated. All dollar amounts are rounded to the
nearest dollar unless otherwise indicated.

- 2 The issues for decision are:

(1) Whether an amount paid by

petitioner to William T. Rogers (Rogers) as compensation during
taxable year 1990 is reasonable within the meaning of section
162(a)(1).

We find the amount paid was not reasonable to the

extent set out below. (2) Whether petitioner is liable for the
accuracy-related penalty under section 6662(d) for substantially
understating its income for the year in issue.2

2

We find it is.

In its petition to this Court, petitioner raised the
issue of whether a second inspection of petitioner's records,
within the meaning of sec. 7605(b), was conducted by respondent's
agent for the 1990 taxable year.
On Jan. 5, 1993, petitioner received a notice of audit for
1990. Upon receipt of the notice of audit for 1990, petitioner
objected to the audit on the basis that the audit was repetitive
and that the Internal Revenue Service (IRS) already had in its
possession information relating to 1990.
Revenue Agent Arthur W. Horton caused a summons to be issued
for information relating to 1990. By letter dated Nov. 18, 1993,
petitioner informed the IRS that petitioner was not going to
produce the records.
A summons enforcement proceeding was initiated in the U.S.
District Court for the Eastern District of Tennessee on June 20,
1994, and a hearing was held on Aug. 29, 1994. Petitioner's
representative appeared at the hearing and objected to the
summons on the ground, inter alia, that the IRS's request to
examine its books of account for 1990 was a second inspection in
violation of sec. 7605(b). The District Court ruled in favor of
the IRS, and petitioner appealed to the Court of Appeals for the
Sixth Circuit.
In United States v. Alpha Med. Management, Inc., 116 F.3d
1481 (6th Cir. 1997), the Court of Appeals for the Sixth Circuit
by an unpublished opinion remanded the case to the District Court
for a determination of which documents sought by the summons were
already in the possession of or accessible to the IRS. In other
respects the District Court's order enforcing the summons was
affirmed. In its ruling, the Court of Appeals found that the IRS
complied with the statutory requirements of sec. 7605(b).
We conclude that there was no second inspection of
petitioner's books of account in violation of sec. 7605(b).

- 3 FINDINGS OF FACT
Some of the facts have been stipulated.

The stipulated

facts and attached exhibits are incorporated herein by this
reference.
A.

Petitioner's Background
Alpha Medical Management, Inc., also known as Alpha Medical,

Inc. (hereinafter petitioner), is a medical management
corporation duly formed and organized under the laws of
Tennessee.

At the time the petition was filed, its principal

place of business was in Chattanooga, Tennessee.

Rogers

incorporated petitioner in 1982, with an initial capital
contribution of $1,000.

He has not made any additional capital

contributions to petitioner.
January 1, 1986.

Petitioner began operations on

By 1990, petitioner had 60 employees.

Petitioner provides medical management services to home
health care agencies and hospitals with home health care
departments.

Home health care agencies are subject to State

licensing requirements and requirements known as Certificate of
Need.

The services petitioner provides to its clients are

tailored to meet each client's individual needs and to assist
each client in complying with the various licensing requirements,
Certificate of Need requirements, and the various Medicare and
Medicaid regulations.

In most instances, petitioner's services

include the management of four categories of operations:
Reimbursement, (ii) accounting, (iii) accounts receivable,

(i)

- 4 billing, and computer operation, and (iv) clinical/
operational/consulting.
Petitioner's entire operation is located in one office in
Chattanooga, Tennessee.

Petitioner's clients' locations grew

from 1 in 1986 to 60 in 1992 in Tennessee, Kentucky, Arkansas,
and Florida.

In 1990, petitioner managed 43 locations.

B.

William T. Rogers' Background and Duties
Since petitioner began operations in 1986, Rogers has been
its president, sole director, and sole shareholder.

Rogers

worked 12 hours a day and was available at all times of the day
by telephone or pager.

During and prior to 1990, Rogers made all

decisions that affected petitioner's mid- and long-range plans,
and Rogers handled any problems that arose with petitioner's
clients or employees.

Rogers did not routinely deal with

petitioner's day-to-day operations or with the day-to-day care of
patients.

Until sometime in 1990 or 1991, Rogers negotiated each

contract petitioner made with its clients.
Rogers has a bachelor of science in biology from Tennessee
Technological University and a doctorate in pharmacy from the
University of Tennessee.

He has more than 25 years of experience

in the health care field.

Rogers was the founder of a

successful, local drugstore chain with seven stores which he sold
in 1986.

Rogers also began a durable medical equipment business

which he sold to a publicly traded company in 1984.

When Rogers

sold the durable medical equipment business, he was offered a

- 5 million-dollar-plus salary to manage National Medical Equipment
California Home Health Care Division.

Rogers turned down that

job offer because he did not want to move to California.
C.

Petitioner's Divisions and Management Team
1.

The Financial Division

Petitioner is divided into two divisions:

The financial

division and the clinical and operations division.

The financial

division provides a complete array of accounting services for
petitioner's clients, including the review of each client's
expenditures to insure that they are reimbursable by Medicare.
Rayburn H. Tankersly (Tankersly), a certified public accountant,
has been petitioner's senior vice president of finance and chief
financial officer in charge of the financial division since
October 1988, when he began working for petitioner.

Tankersly

has been in the medical accounting field since 1969.

Tankersly

was hired, in part, to help Rogers make technical decisions
dealing with Medicare regulations.

Tankersly provides strategic

focus for petitioner's financial division.

He assists in

strategic planning for clients, develops and maintains client
relationships, provides financial guidelines to clients, and
ensures proper staffing for the financial division.

Tankersly

worked 10 to 12 hours a day in 1990.
Tim Stees (Stees), a certified public accountant, has been
petitioner's vice president of finance since late 1989.

Stees

coordinates tax return preparation, participates in strategic

- 6 planning for petitioner and its clients, and develops and
maintains client relationships.

During 1990, Stees was the

controller, in addition to being responsible for supervising
various functions of the payroll and accounts payable
departments.
Petitioner's reimbursement and information systems
departments are part of petitioner's financial division.

From

1987 to 1990, Libby Walker (Walker) was petitioner's director of
reimbursement.

Walker dealt with the Commerce Clearing House

(CCH) guides, the Health Insurance Manual-11 (HIM-11), all the
Government rules, and Medicare regulations.
2.

The Clinical and Operations Division

The operations division provides surveys, advice, and
evaluations for petitioner's clients and develops the operational
and clinical products that are delivered to clients.

Rebecca

Worley (Worley), a registered nurse, has been petitioner's senior
vice president of operations and chief operations officer since
petitioner's inception in 1986.

Worley provides strategic focus

for petitioner's operations division.

She (1) decides the

direction and timing of client selection and development, (2)
translates Rogers' management vision into operational plans, (3)
is responsible for marketing services and petitioner's
development, (4) ensures proper staffing levels and training
programs, (5) guides clients regarding the direction and actions
of their companies, and at one time, (6) oversaw and assisted in

- 7 the development of petitioner's clinical information system.
From 1986 through 1990, Worley worked 10 to 12 hours a day for
petitioner.

Worley directs the nurses petitioner employs.

Donna Stapleton (Stapleton), a registered nurse, is
petitioner's vice president of operations.

Stapleton earned a

Certification in Nursing Administration in 1985 from the American
Nursing Association.

She is responsible for the operational and

clinical oversight of the field staff, acts as a liaison with
State and Federal fiscal intermediaries regarding regulatory
issues, provides evaluations and advice to clients, and handles
personnel management, development, and recruitment.
Currently, petitioner has three senior consultants with
nursing backgrounds in its operations division.

Each senior

consultant, along with Stapleton, supervises a team of two to
four nurses.

Before the senior consultants were hired sometime

after 1990, these duties were performed under Rogers' guidance.
3.

Petitioner's Management Team--General

From 1986 to 1988, petitioner's management tasks were
performed by Rogers and Worley.

In late 1988, Tankersly joined,

and in late 1989, Stees joined petitioner's management team.
Rogers, Tankersly, and Worley knew petitioner's business; Rogers
had the reputation that brought the clients in and finalized the
contracts.

Sometime in 1990 or 1991, a salesman began working

for petitioner out of Nashville.
executive and management staff.

Rogers recruited petitioner's

- 8 Rogers, Tankersly, and Worley attended State and national
home care association meetings, entertained and recruited
clients, visited exhibit halls to see what vendors were offering,
and shared the information they obtained with each other.
1990, petitioner's board of directors included:

In

Rogers,

president/CEO; Tankersly, vice president/CFO; and Worley,
executive vice president/secretary.
D.

Petitioner's Services
Petitioner provides its clients with a team of employees who

have advanced skills and knowledge in dealing with Medicare and
Medicaid regulations.

The team conducts a mock survey to

determine whether the clients are in compliance with State
licensing, Federal conditions of participation, and the rules of
other accrediting bodies and recommends ways to comply or
improve.

Rogers developed the parameters for the mock survey

team and, together with Worley, developed the product line for
the mock survey.

The mock survey replicates the annual

inspection required by State and Federal regulatory authorities,
and as a result of the mock survey, petitioner's clients have
exceptional records with respect to their inspections.
Petitioner has policy manuals that discuss petitioner's
products and explain how services are to be provided to its
clients.

The policy manuals are periodically revised.

By 1989,

petitioner had 8 policy manuals, and by 1992 petitioner had 11

- 9 policy manuals.

Rogers helped develop most, if not all, of

petitioner's policy manuals.
During 1989 and 1990, there was a nursing shortage.

Rogers

worked with an advertising firm to develop a recruitment plan to
help petitioner's clients recruit adequate staffs.

Rogers

developed the per-visit method of compensation for nurses and
recommended its use to petitioner's clients, which increased the
availability of nurses.
Rogers also suggested developing the Alpha Information
System, a clinical system that provides documentation and
assistance to the clinician providing the services and reduces
paperwork.

The use of the Alpha Information System enhances the

quality of patient care by allowing the nurse to spend more time
on patient care and less time on documentation and ensures
accuracy.

There were no other computer systems like it in the

home health care industry in 1990.

Rogers drew the schematics

about how home health care works for petitioner's computer
programmers, who then developed the system.
Petitioner's clients have to attend Medicare preexit and
exit conferences to determine whether Medicare agrees with the
amounts the clients were reimbursed for.

At preexit conferences

Medicare informs the client of proposed adjustments and items
that may be disallowed.

At exit conferences, the clients present

explanations for the items Medicare proposed to adjust.

If an

item is disallowed, the client has to reimburse Medicare what

- 10 Medicare paid the client.

During the years 1986 through 1990,

Rogers attended all of petitioner's clients' Medicare preexit and
exit conferences and vigorously defended their positions.
Usually a second employee of petitioner attended the conferences
with Rogers.
E.

Petitioner's Key Employees' Compensation
Petitioner awards bonuses to almost all of its employees,

both management and nonmanagement.

Bonuses are based upon

contributions to petitioner's overall profit and employee
performance.

For the years 1988, 1989, and 1990, petitioner paid

its key employees (other than Rogers) the following compensation
amounts:
1988
1989
1990
Employee
Salary Bonus
Total
Salary Bonus
Total
Salary Bonus
Worley
$36,838 $32,500 $69,338 $36,838 $90,000 $126,838 $36,838
Total
$190,000 $226,838 Tankersly 10,417
2,500 12,917
50,000 57,500 107,500
50,000 165,000 215,000
Walker
36,838 23,000 59,838
36,900 46,500
83,400
35,000
50,000
85,000
Frazier
35,006
7,500 42,506
35,000 22,500
57,500
35,000
32,500
67,500
Goodwin
------17,500 10,000
27,500
35,000
31,500
66,500
Stees
------12,250 10,000
22,250
42,000
20,000
62,000

In 1990, Rogers determined the amounts of the bonuses.
F.

Rogers' Compensation
During the years 1986 through 1990, Rogers determined how

much petitioner paid him.

For those years, Rogers gave himself a

base salary, plus a bonus based on a percentage of petitioner's
pretax profit as follows:

- 11 Year
1987
1988
1989
1990

Base Salary
$75,000
300,000
500,000
1,000,000

Bonus
25% of pre-tax profit
25% of pre-tax profit
50% of pre-tax profit
50% of pre-tax profit

Rogers' salary and bonus percentage were reflected in
petitioner's corporate minutes at the beginning of each year.
For 1990, Rogers gave himself a large base salary increase
($500,000 to $1 million) to compensate himself for turning down
the 1984 California job offer.

For 1986 through 1990, Rogers'

compensation compared to the total paid to other employees,
petitioner's taxable income, petitioner's gross receipts, and the
percentage of gross receipts which his compensation made up was
as follows:
Rogers'
Year Compensation
Receipts
1986
$66,943
1987
75,914
1988
431,702
1989
928,883
1990
4,439,180

Other
Employees

Taxable Income

Gross Receipts

$220,273
317,562
595,141
1,054,281
1,636,264

$138,012
240,063
620,313
1,743,853
2,432,253

$848,403
1,196,849
2,542,912
4,993,761
9,880,760

% of Gross
7.8
6.0
16.9
18.6
44.9

During the years 1986 through 1990, petitioner did not have
pension plans or other forms of deferred compensation for Rogers
or other key employees.

Petitioner paid dividends to Rogers, its

sole shareholder, of $1,000 in 1989, $1,500 in 1990, and $5,500
in 1991.

Rogers is the only person who had authority to declare

- 12 dividends for petitioner.

For the years 1986 through 1990,

petitioner's retained earnings were as follows:
Year
1986
1987
1988
1989
1990
G.

Retained Earnings
$96,623
247,338
649,000
1,707,137
3,388,705

Petitioner's Audits
On December 4, 1990, petitioner received a notice of audit

for 1989 (the 1989 audit).
December 4, 1992.

The 1989 audit continued until

During the 1989 audit of petitioner, the

Internal Revenue Service (IRS) analyzed the issue of the
deductibility of compensation paid to Rogers and obtained
information relating to the calculation of compensation in both
1989 and 1990, including the amount of compensation petitioner
paid Rogers, and petitioner's 1990 tax return.

Petitioner paid

Rogers $928,883 of compensation in 1989 and $4,439,180 in 1990.
Respondent allowed $400,000 as a deduction for reasonable
compensation.
OPINION
Issue 1. Whether the Amount Paid by Petitioner to Rogers as
Compensation During Taxable Year 1990 Is Reasonable Within the
Meaning of Section 162(a)(1)
Section 162(a)(1) allows a corporation to deduct as a
business expense "a reasonable allowance for salaries or other
compensation for personal services actually rendered".

To come

within the ambit of section 162(a)(1), the compensation must be

- 13 both:

(1) Reasonable in amount, and (2) paid purely for services

rendered to the corporation.

Charles Schneider & Co. v.

Commissioner, 500 F.2d 148, 151 (8th Cir. 1974), affg. T.C. Memo.
1973-130; sec. 1.162-7(a), Income Tax Regs.

It is clear that

bonuses may be part of the allowable deductions as long as the
sum of the base pay and the bonuses does not exceed a reasonable
Pacific Grains, Inc. v. Commissioner, 399 F.2d

compensation.

603, 605 (9th Cir. 1968), affg. T.C. Memo. 1967-7; sec. 1.162-9,
Income Tax Regs.3

Neither party has suggested that Rogers did

not render valuable services to petitioner.

Accordingly, we will

focus on the first element of the deductibility test--whether the
amounts of the payments were reasonable.
Whether the compensation is reasonable is a question to be
resolved on the basis of an examination of all the facts and
circumstances of the case.

Mayson Manufacturing Co. v.

Commissioner, 178 F.2d 115, 118 (6th Cir. 1949), revg. a
Memorandum Opinion of this Court; Estate of Wallace v.
Commissioner, 95 T.C. 525, 553 (1990), affd. 965 F.2d 1038 (11th
Cir. 1992).
3

Respondent's determination is presumed correct, and

Sec. 1.162-9, Income Tax Regs., provides in part:

Bonuses to employees will constitute allowable
deductions from gross income when such amounts are 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 reasonable compensation for the services
rendered. * * *

- 14 petitioner bears the burden of proving the reasonableness of the
compensation.
(1933).

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

If petitioner proves respondent's determination to be

wrong, the Court must then decide the amount of compensation that
was reasonable.

Pepsi-Cola Bottling Co. v. Commissioner, 61 T.C.

564, 568 (1974), affd. 528 F.2d 176 (10th Cir. 1975).
In addressing the reasonableness of compensation, the Court
of Appeals for the Sixth Circuit, the court to which an appeal in
this case lies, has adopted a set of basic factors that should be
considered by the Court in reaching its decision:

(1) The

employee's qualifications; (2) the nature, extent, and scope of
the employee's work; (3) the size and complexities of the
employer's business; (4) a comparison of salaries paid with the
employer's gross and net income; (5) the prevailing general
economic conditions; (6) a comparison of salaries paid with
distributions of retained earnings; (7) the prevailing rates of
compensation for comparable positions in comparable concerns; (8)
the salary policy of the employer as to all employees; and (9) in
the case of small corporations with a limited number of officers,
the amount of compensation paid to the particular employee in
previous years.

Mayson Manufacturing Co. v. Commissioner, supra;

see also Home Interiors & Gifts, Inc. v. Commissioner, 73 T.C.
1142, 1155-1156 (1980).

The situation must be considered as a

- 15 whole with no single factor decisive.

Mayson Manufacturing Co.

v. Commissioner, supra.
In analyzing these factors, the Court must carefully
scrutinize the facts of a case in which the paying corporation is
controlled by an employee to whom the compensation is paid.

For

example, section 1.162-7(b)(1), Income Tax Regs., cautions that
in the case of a corporation having few shareholders, "An
ostensible salary paid by a corporation may be a distribution of
a dividend on stock."
supra at 555.

See Estate of Wallace v. Commissioner,

In such a situation, we must be convinced that the

purported compensation was paid for services rendered by the
employee as opposed to a distribution of earnings to him that the
employer could not deduct.

RTS Inv. Corp. v. Commissioner, 877

F.2d 647, 650 (8th Cir. 1989), affg. per curiam T.C. Memo. 198798; Seven Canal Place Corp. v. Commissioner, 332 F.2d 899 (2d
Cir. 1964), remanding T.C. Memo. 1962-307.
1.

Rogers' Qualifications

An employee's superior qualifications for his or her
position with the business may justify high compensation.

See,

e.g., Home Interiors & Gifts, Inc. v. Commissioner, supra at
1158; Dave Fischbein Manufacturing Co. v. Commissioner, 59 T.C.
338, 352-353 (1972).
Although Rogers had no formal training in business
management, he has more than 25 years of practical business

- 16 experience in the health care industry.

Furthermore, Rogers

developed a single drugstore into a chain of stores that he sold
in 1986 and a hospital supply business that he sold to a publicly
traded company in 1984.
Rogers was instrumental in developing petitioner's computer
software programs, mock surveys, and policy manuals, solving its
staffing problems, and developing cost-efficient operating
procedures.

Petitioner's success is mainly attributable to

Rogers' ambition, creativity, vision, and energy, not to its
investment in capital.

See Home Interiors & Gifts, Inc. v.

Commissioner, supra at 1158; Dave Fischbein Manufacturing Co. v.
Commissioner, supra.
2.

This factor favors petitioner.

Nature, Extent, and Scope of Rogers' Work

An employee's position, hours worked, duties performed, and
general importance to the success of a business may justify high
compensation.

Home Interiors & Gifts, Inc. v. Commissioner,

supra at 1158.

In this case, the history of Rogers'

contributions to petitioner must be considered, rather than just
his contributions during the year at issue, because the
compensation petitioner paid to him during the year at issue
represents, in part, an attempt to rectify prior
undercompensation.

(See our discussion under factor 9, infra.)

At one time or another since its inception, Rogers has held
most of the management positions at petitioner.

He has

- 17 consistently worked 12 hours each day in the office and is on
call 24 hours a day.

Rogers' responsibilities have covered a

wide range of activities, including sales, personnel, operations,
finance, planning, and flying the corporate airplane.
The record shows that no other officer of petitioner has the
breadth of experience with the company which Rogers has.
However, his experience has not been a solitary one; he has been
assisted by a hard-working and well-qualified management team,
and in particular by Worley.
By any reasonable measure, Rogers' efforts on behalf of
petitioner have been highly successful.

Petitioner's

profitability is attributable to sales of its services and
effective cost containment.

"Getting and keeping customers is,

of course, the lifeblood of any business".

Kennedy v.

Commissioner, 671 F.2d 167, 176 (6th Cir. 1982), revg. 72 T.C.
793 (1979).

Rogers is petitioner's primary salesman and deal

closer; he personally obtained each of petitioner's clients and
negotiated each contract petitioner made with its clients.4
Since 1986, petitioner's gross receipts have increased
almost 12 times, taxable income has increased almost 18 times,
and net worth has shown an increase of over 35 times.

4

See Home

We note, however, that Tankersly and Worley also
entertained and recruited clients, and since 1989, Stees'
responsibilities have included developing and maintaining client
relationships.

- 18 Interiors & Gifts, Inc. v. Commissioner, supra at 1157-1158
(extraordinary corporate performance is evidence that officer's
compensation is not excessive); see also Kennedy v. Commissioner,
supra; cf. National Cottonseed Prods. Corp. v. Commissioner, 76
F.2d 839 (6th Cir. 1935) (poor performance did not justify
compensation paid), affg. in part and revg. in part 28 B.T.A. 67
(1933).

Furthermore, the 1990 gross receipts were 98 percent

greater than the 1989 receipts, yet expenses increased by only 27
percent.

Petitioner's successful cost containment is

attributable in part to innovative management programs which were
developed by Rogers and Worley.
Significantly, petitioner increased its business and revenues
during a time of a nursing shortage.

Petitioner's ability to

increase its business while presented with a restricted labor
force was due in part to petitioner's use of an innovative
compensation plan for the nurses and the use of the drug
interaction system.

The compensation plan and the drug

interaction system were both developed in part by Rogers.

This

factor favors petitioner.
3.

Size and Complexities of Petitioner's Business

Petitioner's gross receipts--an indicator of its size--were
$9,880,760 in 1990.

From 1986 to 1990, the number of employees

at petitioner increased from 2 (Rogers and his wife) to 60, and
the number of client locations increased from 1 to 43, which

- 19 included locations in the States of Tennessee, Kentucky,
Arkansas, and Mississippi.

Moreover, approximately 30 percent of

the increase in client locations occurred from 1989 to 1990.
Finally, the home health care visits managed by petitioner in
1990 almost doubled from the 500,000 managed in 1989.

Thus,

petitioner's business dramatically increased in 1990 compared to
1989.
Petitioner is in a complex business.

The management of the

home health care business requires special expertise with regard
to Medicare, Medicaid, insurance requirements, and State health
care licensing regulations.

In addition to technical expertise,

compliance with the various insurance programs requires accurate
documentation of each home visit.

Petitioner managed the

documentation and reporting of almost a million home health care
visits in 1990.

The documentation and reporting of these visits

included both clinical information and claims information which
were processed through the Alpha Information System that was
designed in part by Rogers and Worley and implemented by Rogers.
This factor favors petitioner.
4.

Comparison of Salaries Paid to Gross and Net Income

In 1990, Rogers' compensation was 44.9 percent of
petitioner's gross receipts and 64.6 percent of its net taxable

- 20 income (before deduction of Rogers' compensation).5

Although it

is often helpful to consider compensation as a percentage of both
gross receipts and net income, the latter is in most cases more
probative, because it more accurately gauges whether a
corporation is disguising the distribution of dividends as
compensation.

Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d

1315, 1325-1326 (5th Cir. 1987), affg. T.C. Memo. 1985-267.
However, as noted previously, each case turns on its own facts
and circumstances, and no particular ratio between compensation
and gross or net taxable income is a prerequisite for a finding
of reasonableness.
Petitioner cites several cases in which this Court found
that the compensation paid was reasonable notwithstanding the
fact that the compensation was a large portion of the taxpayer's
gross and net income.

See, e.g., Pulsar Components Intl., Inc.

v. Commissioner, T.C. Memo. 1996-129 (reasonable compensation was
27.3 percent of gross receipts of $10,693,635 and 82.4 percent of
$3,546,647 taxable net income (before deduction of the
compensation at issue) in 1985); Mad Auto Wrecking, Inc. v.
Commissioner, T.C. Memo. 1995-153 (reasonable compensation was
34, 28, and 38 percent of gross receipts of $2,554,942,

5

In 1990, Rogers' compensation was $4,439,180;
petitioner's net taxable income after deducting Rogers'
compensation was $2,432,253. Thus, petitioner's net taxable
income before deducting Rogers' compensation was $6,871,433.

- 21 $2,169,125, and $1,884,853 and 93, 91, and 103 percent of net
taxable income of $923,690, $662,974, and $688,801 (before
deducting officer's compensation at issue) for 1989, 1990, and
1991, respectively); Acme Constr. Co. v. Commissioner, T.C. Memo.
1995-6 (reasonable compensation was 10.2 percent of gross income
of $4,330,871 and 73.23 percent of net taxable income of $603,771
(before deduction of compensation at issue in 1990); BOCA
Constr., Inc. v. Commissioner, T.C. Memo. 1995-5 (reasonable
compensation was 27.7 and 31.9 percent of gross receipts of
$2,488,322 and $2,558,903 for 1989 and 1990, respectively, and
approximately 80 percent of net income of $847,328 and $1,055,086
(not including the compensation at issue in each year).
In these cases cited by petitioner, this Court found that
the compensation paid by the taxpayer was reasonable even though
it was a large portion of the taxpayer's gross receipts and net
income.

However, petitioner fails to recognize that unlike the

instant case where the compensation being challenged was paid to
only one employee, Rogers, in Pulsar Components Intl., Inc., Mad
Auto Wrecking, Inc., and BOCA Constr., Inc. the compensation at
issue was paid to two officer/shareholders.

Thus, the facts of

those cases and the case at hand are clearly distinguishable.
Petitioner contends that a portion of the compensation paid
Rogers in 1990 is for services he provided petitioner in prior
years.

Similarly, in Acme Constr. Co., the compensation was paid

- 22 in part to the officer/shareholder for services he performed in
prior years.

In that case, we found that the compensation was

reasonable, notwithstanding the fact that it was 73.23 percent of
net taxable income (before deduction of compensation at issue).
However, as noted in Owensby & Kritikos, Inc. v. Commissioner,
supra at 1326 n.34:
the absolute probative value of compensation as a
percentage of net income as an isolated factor is often
minimal. The main reason for this is that this factor
is dependent upon a variable--the company's income-that, at least in the short run, may be unrelated to
the value of an individual's services. For example, a
company with a high income might pay unreasonable
salaries to its shareholder-employees; yet that
compensation as a percentage of net income would be low
because of the company's high income. On the other
hand, a company with low net income might pay virtually
all of that income to its shareholder-employees in
salaries that are unquestionably reasonable.
In Acme Constr. Co. the net taxable income was $603,771; in
the case at bar the net taxable income is $6,871,433 (before
deduction of the compensation at issue).

The difference in

magnitude of the respective companies' net incomes makes the
comparison of the relevant percentages of limited probative
value.
We find that in this case the large portion of net income
paid in compensation to Rogers is a factor that points to the
conclusion that the compensation paid was in part unreasonable.
5.

General Economic Conditions

This factor helps to determine whether the success of a
business is attributable to general economic conditions as

- 23 opposed to the efforts and business acumen of the employees.
General economic conditions may affect a business' performance
and indicate the extent (if any) of the employees' effect on the
company.

Mayson Manufacturing Co. v. Commissioner, 178 F.2d at

119-120.

Adverse economic conditions, for example, tend to show

that an employee's skill was important to a company that grew
during the bad years.
At trial, petitioner presented expert witness testimony as
to the reasonableness of Rogers' compensation.

Expert witness

testimony is appropriate to help the Court understand an area
requiring specialized training, knowledge, or judgment.

Fed. R.

Evid. 702; Snyder v. Commissioner, 93 T.C. 529, 534 (1989).
Court, however, is not bound by an expert's opinion.

The

We weigh an

expert's testimony in light of his or her qualifications and with
respect to all credible evidence in the record.

Depending on

what we believe is appropriate under the facts and circumstances
of the case, we may either reject an expert's opinion in its
entirety, accept it in its entirety, or accept selective portions
of it.

Helvering v. National Grocery Co., 304 U.S. 282, 294-295

(1938); Seagate Tech., Inc. & Consol. Subs. v. Commissioner, 102
T.C. 149, 186 (1994).
Petitioner's expert, Mr. James V. Hughes (Hughes), is an
expert on compensation with Arthur Anderson & Co.

Hughes

testified at trial and submitted a report that he coauthored with
Bruce K. Benesh (Benesh).

Benesh did not testify at trial.

- 24 Petitioner's experts concluded that the compensation paid Rogers
was reasonable.

Hughes based his conclusion on various sources,

one of which was relevant industry and compensation data.

This

data, according to Hughes and Benesh, describes the economic
conditions in which petitioner operated from 1986 through 1990.
In their report, Hughes and Benesh provided data they
gathered from the Tennessee Board of Licensing Health Care
Facilities and the National Association for Home Care,
Washington, D.C.

The data shows that there were fewer licensed

health care agencies in the State of Tennessee in each year after
1986.

For instance, there were 379 licensed health care agencies

in the State of Tennessee in 1986, 326 in 1989, and 320 in 1990.
Hughes interpreted this data to indicate that the health care
industry was "slowing down".

Hughes and Benesh attributed this

slowing down to the increasing Medicare paperwork and unreliable
payment policies.
Petitioner's gross receipts, net income, and retained
earnings have increased every year since 1986.

It is evident

that petitioner was able to take advantage of the business
opportunities that arose in the consolidating industry.

Hughes

and Benesh attributed this ability to Rogers' business acumen and
knowledge of the industry.
Although we agree that the data supports a finding that
there were fewer health care agencies in the State of Tennessee
in each year after 1986, we note that more than 98 percent of the

- 25 consolidation occurred between 1986 and 1989, and less than 2
percent of the consolidation occurred after 1989.

Furthermore,

Hughes and Benesh have provided no data on the status of the home
health care industry in any of the other States in which
petitioner does business.
Significantly, although Hughes and Benesh characterized the
home care industry as "contracting", they provided no data that
shows that the health care business actually was contracting,
instead of consolidating.

The data shows only that there were

fewer home health care agencies, not that there were fewer
dollars spent on home health care.

In fact, due to the 1989

changes in the regulations governing reimbursements to home
health care agencies by Medicare, payment for a greater number of
services was allowed, which provided potential for increased
revenue.6

Thus, the data actually shows that each year there

were fewer agencies operating in a business that had expanding

6

At trial, Rogers gave the following testimony in response
to petitioner's lawyer's questions:
Q.
And as a result of the number of home health industries
in the State of Tennessee, would you say that it was-A.

It was a free-for-all.

Q.

--a competitive market?

A.

It was a free-for-all.

Thus, Rogers did not characterize the business conditions as
competitive. He chose, instead, to use a description that would
not be unfamiliar to a 49'er participating in the California gold
rush.

- 26 opportunities for greater revenues.

Under these facts and

circumstances, we do not assume that a consolidation phase is a
per se adverse economic condition for a business.
Thus, petitioner's evidence does not support a finding that
the home health care business suffered from adverse economic
conditions, or that the home health care business was
significantly more competitive in 1990 than it was in 1989.

This

factor points to the conclusion that the compensation paid Rogers
in 1990 was in part unreasonable.
6.

Comparison of Salaries Paid With Distributions of
Retained Earnings

The failure to pay more than minimal dividends may suggest
that reported compensation actually is (in whole or in part) a
dividend.

Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d at

1322-1323; Charles Schneider & Co. v. Commissioner, 500 F.2d at
151.

Corporations, however, are not required to pay dividends.

Shareholders may be equally content with the appreciation of
their stock caused, for example, by the retention of earnings.
Owensby & Kritikos, Inc. v. Commissioner, supra; Home Interiors &
Gifts, Inc. v. Commissioner, 73 T.C. at 1162.
In reviewing the reasonableness of an employee's
compensation, we often apply a hypothetical independent investor
standard to determine whether a shareholder has received a fair
return on investment after payment of the compensation in
question.

Owensby & Kritikos, Inc. v. Commissioner, supra at

- 27 1326-1327; Pulsar Components Intl., Inc. v. Commissioner, T.C.
Memo. 1996-129.

Rogers had sole discretion of whether to pay a

dividend, and the amount thereof.
dividends in the year at issue.

Petitioner paid $1,500 in
Although the amount of this

dividend is a 150-percent return on the capital invested, it is
insignificant in comparison to petitioner's earnings.
A corporation's dividend policies should not, however, be
viewed in a vacuum.

Owensby & Kritikos, Inc. v. Commissioner,

supra at 1326-1327.

The Court should look at the total return

the corporation is earning for its shareholders, the prime
indicator of which is the return on shareholders' equity.

Id.

If, * * * the company's earnings on equity remain at a
level that would satisfy an independent investor, there
is a strong indication that management is providing
compensable services and that profits are not being
siphoned out of the company disguised as salary.
[Elliotts, Inc. v. Commissioner, 716 F.2d 1241, 1247
(9th Cir. 1983), revg. T.C. Memo. 1980-282; fn. ref.
omitted.]
Petitioner's shareholder's equity grew from $97,623 at
yearend 1986 to $1,708,137 at yearend 1989 to $3,389,705 at
yearend 1990.7

Petitioner's total return on equity for the year

at issue was 98.65 percent.8

This return is impressive, and an

7

In this case, shareholder's equity is the sum of Rogers'
original capital investment, $1,000, plus retained earnings.
8

Return on equity is calculated after deducting all
amounts paid as compensation. Thus, total return on equity is
the sum of the increase in shareholder's equity from yearend 1989
to yearend 1990 plus dividends paid in 1990, divided by
shareholder's equity at yearend 1989.

- 28 independent investor would undoubtedly be satisfied with such a
return.
7.

This factor favors petitioner.
Prevailing Rates of Compensation for Comparable
Positions in Comparable Concerns

Respondent's regulations provide that "It is, in general,
just to assume that reasonable and true compensation is only such
amount as would ordinarily be paid for like services by like
enterprises under like circumstances."

Sec. 1.162-7(b)(3),

Income Tax Regs.
Petitioner relied on its expert witnesses' testimony and
reports for evidence on this factor.

Petitioner submitted a

report written by Joe T. Fisher (Fisher), in addition to the one
coauthored by Hughes and Benesh.
Petitioner's Experts' Reports
Although Fisher does not specialize in executive
compensation, he is a member of the American College of Health
Care Executives and has held various executive positions in the
health care industry since 1977.

In his professional capacity

Fisher has become familiar with the various incentive plans that
have been administered through various health care companies, he
has conducted studies and surveys of executive compensation, and
he has participated in the design of executive compensation
plans.

In his report, Fisher concluded that the amount of

compensation paid Rogers in 1990 was reasonable.

Fisher's

report, however, contains several inaccuracies that cause this

- 29 Court to discount his opinion.

For instance, in his report

Fisher stated that "Rogers personally designed and implemented a
computer system for * * * [petitioner]", and that "Rogers was
personally involved * * * in the day-to-day operations of
* * * [petitioner] from the period of 1986 through 1990."
Rogers, however, testified to the contrary.
Furthermore, although Fisher testified that he compared
Rogers' compensation to that paid to others in comparable
positions, he did not cite the sources for those comparisons in
either his testimony or his report.

Fisher's opinion does not

appear to be based on verified factual data.
Fisher's opinion little weight.

Thus, we accord

See Diverse Indus., Inc. v.

Commissioner, T.C. Memo. 1986-84.
Petitioner's other experts, Hughes and Benesh, also
submitted a written report.

The report coauthored by Hughes and

Benesh states, however, that they "were unable to locate any
comparable survey data on home health care agency managers
similar to * * * [petitioner]."

Hughes and Benesh, therefore,

were unable to perform a direct comparison.

Nor were they able

to identify individuals in a similar employment position, with
similar experience, qualifications, knowledge, and
responsibilities to those of Rogers.

Despite these obstacles,

Hughes and Benesh were able to create, in their opinion, a
reasonable comparison by examining the specific functions

- 30 performed by Rogers and then comparing the compensation paid to
Rogers with that paid to the person performing functions similar
to those performed by Rogers.

Thus, Hughes and Benesh first

compared Rogers to a physician.
In comparing the compensation paid to Rogers to the
compensation paid to a physician, Hughes and Benesh determined
that Rogers' average annual compensation was approximately 18
percent of petitioner's total revenue, whereas for a physician
the average median compensation-to-production ratio is 40
percent; and the compensation for a physician in the 90th
percentile is 59 percent, which exceeds the percentage paid to
Rogers in 1990.
In the alternative, Hughes and Benesh compared Rogers'
position and compensation to that of a real estate sales agent.
For this comparison, Hughes and Benesh relied upon data provided
in a report entitled "Real Estate Profitability 1992", which was
published by the National Association of Realtors.

Hughes and

Benesh found that the median compensation for real estate agents
who are paid on a sliding scale starts at 55 percent of the
commission paid by the sellers to the real estate broker and
increases to 63 percent.9

9

On the basis of these comparisons,

Compensation on a sliding scale is based upon the notion
that a salesperson will receive a larger portion of the
commission as her total dollar volume of sales increases.

- 31 Hughes and Benesh determined that Rogers' compensation as a
percentage of gross revenue was low.
We do not find Hughes and Benesh's opinion persuasive.

For

the evidence of comparable salaries to be accorded any weight, it
must be shown that the salaried positions are actually
comparable.

Work responsibility, nature of operations, years in

which the salary is paid, and even the local cost of living may
be taken into account.

See, e.g., Thomas A. Curtis, M.D., Inc.

v. Commissioner, T.C. Memo. 1994-15; Diverse Indus., Inc. v.
Commissioner, T.C. Memo. 1986-84; Snyder Bros. Co. v.
Commissioner, T.C. Memo. 1980-275; Townsend v. Commissioner, T.C.
Memo. 1980-264.
The similarity Hughes and Benesh found between a physician
and Rogers was that both are in the health care business, and
that Rogers performed his duties well with the support of several
office professionals and nurses.

Thus, they concluded that just

as a medical practice cannot exist without a physician, without
Rogers petitioner's supporting staff would not perform their
duties and petitioner would not exist.

This superficial

comparison is specious and is accorded no weight.
Hughes' and Benesh's comparison of Rogers' compensation to
that of a real estate agent is equally unpersuasive.

In their

report, Hughes and Benesh state that although real estate agents
and Rogers perform similar functions in their jobs, e.g.,

- 32 research the market for prospective buyers and sellers, solicit
business, provide consulting expertise, negotiate agreements with
prospective clients, and assist with paperwork, Rogers'
compensation as a percentage of petitioner's gross revenue is
"much lower than the [real estate] agents' median commission",
which is 55 to 63 percent of the commission paid by the seller to
the real estate broker.
Petitioner's experts, however, ignore the fact that the
industry publication that they relied upon for their data reports
that the median amount of the net compensation paid to real
estate sales agents in the South in 1992, who are compensated on
a sliding scale, is approximately $31,000.10

The amount of

Rogers' compensation in 1990 was $4,439,180.

Thus, although the

amount of Rogers' compensation is more than 140 times greater
than the median amount paid to persons who, according to Hughes
and Benesh, perform comparable functions, Hughes and Benesh
conclude that Rogers' level of compensation is comparatively low.
Previously, we stated that the absolute probative value of
measuring compensation as a percentage of income is often minimal
when used as an isolated factor.

10

We do not find that the data

The report also states that the typical established real
estate salesperson is a 49-year-old female who derives 67 percent
of her household income from the practice of residential real
estate brokerage. We have not given any weight to these
differences between the typical real estate salesperson and
Rogers.

- 33 relied upon by Hughes' and Benesh's report supports their
conclusion.

Hughes' and Benesh's total disregard of the actual

amounts paid to those who, in their opinion, perform jobs
requiring functions comparable to those required of Rogers is
suspect.

Thus, we find petitioner's experts' opinions of dubious

value.
Respondent's Witness
Respondent chose not to rely upon an expert witness for an
opinion and chose instead to rely upon Revenue Agent Horton to
explain how he determined $400,000 was the reasonable amount of
compensation for petitioner to pay Rogers.
expert on compensation.

Horton is not an

Horton based his determination of the

compensation that would be reasonable upon his experience as an
IRS agent, and some general statistics on the average
compensation paid to an officer of a business of approximately
the same size as petitioner.

There is no evidence that Horton

based his determination on the prevailing rates of compensation
for comparable positions in comparable concerns.

Therefore, we

accord Horton's testimony regarding this factor no weight.
factor favors neither party.
8.

This

We consider it neutral.

Salary Policy of Petitioner as to All Employees

Courts have considered salaries paid to other employees of a
business in deciding whether compensation is reasonable.

Kennedy

v. Commissioner, 671 F.2d at 173; Home Interiors & Gifts, Inc. v.

- 34 Commissioner, 73 T.C. at 1159.

We look to this factor to

determine whether Rogers was compensated differently than
petitioner's other employees solely because of his status as a
shareholder.
Petitioner deducted total compensation of $6,075,444 in
1990.

As a percentage of total compensation paid, Rogers

received 73 percent, even though he constituted less than 2
percent of petitioner's employees.11

Furthermore, of the total

compensation paid to petitioner's seven key employees (including
Rogers), $5,162,018, or 85.99 percent, was paid to Rogers.12
Moreover, the compensation of the highest paid nonshareholder,
Worley, was 5.1 percent of the amount paid to Rogers.

The

disparity between the compensation paid to the nonshareholders
and that paid to the shareholder--Rogers--is patent.

Further

exploration of this situation is required.
Contingent compensation paid under a longstanding arm'slength agreement will usually be upheld even if an incentive
formula results in greater compensation than the parties
anticipated at the time they entered into the contract.

Owensby

& Kritikos, Inc. v. Commissioner, 819 F.2d at 1327, 1328;

11

Thus, Rogers' compensation was almost three times
greater than the total compensation paid to all of the other
employees.
12

Thus, Rogers' compensation was more than six times the
total amount paid the other key employees.

- 35 Elliotts, Inc. v. Commissioner, 716 F.2d at 1248; Kennedy v.
Commissioner, supra at 174.

Rogers' bonus formula was

established in the corporate minutes at the beginning of 1989.13
Thus, the bonus formula was not longstanding.

Cf. Mayson

Manufacturing Co. v. Commissioner, 178 F.2d at 120 (bonus
contracts basically unchanged since they were negotiated in 1929,
held reasonable for taxable year 1943).

Rogers is the 100-

percent shareholder of petitioner, its director, and its
president.

Rogers alone determined the salary and bonus

compensation of every employee, including himself.
and petitioner were not dealing at arm's length.

Thus, Rogers
See Estate of

Wallace v. Commissioner, 95 T.C. at 555; cf. Mayson Manufacturing
Co. v. Commissioner, supra at 121 (bonus plan established by
board of directors for minority shareholders was an arm's-length
transaction).

Where an employer and employee are not dealing at

arm's length, the amount of compensation may be unreasonable.
Owensby & Kritikos, Inc. v. Commissioner, supra at 1324;
Elliotts, Inc. v. Commissioner, supra at 1246.
Petitioner notes on brief that respondent previously
reviewed the bonus formula in the examination of petitioner's
1989 return.

The result of that examination was a $211 refund,

and no adjustment was proposed to the deduction for compensation
13

In 1989, Rogers' base salary was $500,000; in 1990 it
was $1 million. In both years, the bonus formula was 50 percent
of pretax profit.

- 36 by petitioner.

Petitioner contends this fact is of particular

importance in this case.
Contrary to the position of petitioner, we do not find that
the fact respondent chose not to assert deficiencies in the prior
examination is necessarily important, or that it indicates that
the IRS accepted the manner in which compensation was determined.
See Owensby & Kritikos, Inc. v. Commissioner, supra at 1329; cf.
Mayson Manufacturing Co. v. Commissioner, supra at 121
(commission contract approved and accepted by the Commissioner
over a period of a number of years).

We note that Rogers was

paid total compensation of $928,883 in 1989, compared to
$4,439,180 in 1990.

The dramatic increase raised the stakes

involved and thereby increased respondent's incentive to
challenge the payments.

Owensby & Kritikos, Inc. v.

Commissioner, supra at 1329 n.57.
The great disparity between the amounts paid to the
nonshareholders and the sole shareholder--Rogers--and the fact
that Rogers' compensation plan was not the result of a
longstanding arm's-length agreement point to the conclusion that
the compensation paid Rogers in 1990 was in part unreasonable.
9.

Amount of Compensation Paid to Rogers in Previous Years

We note at the outset that respondent concedes on brief that
the maximum reasonable compensation for Rogers in 1990 is
$1,837,821.

Respondent arrived at this amount by calculating the

- 37 percentage of gross receipts that Rogers received as compensation
in 1989--18.6009 percent--and applying that percentage to
petitioner's 1990 gross receipts.

Petitioner contends that,

although Rogers' compensation in 1990 was 44.9 percent of that
year's gross receipts, it is reasonable because when the 1990
percentage is averaged with the prior years' percentages, the
average percentage is 18.84 percent, which is almost the same
percentage as the compensation respondent allowed in 1989.14
Thus, petitioner argues that the compensation paid Rogers in
1990 was, in part, paid to compensate him for undercompensation
in earlier years.

Respondent counters that in making this

argument petitioner, in effect, is seeking to deduct in 1990
compensation for services performed by Rogers in prior years.

14

Rogers' compensation in 1986, 1987, 1988, 1989, and 1990
measured as a percentage of petitioner's gross receipts in each
of those years is 7.8, 6.0, 16.9, 18.6, and 44.9 percent,
respectively. The average of the percentages is 18.84 percent.
We find, however, that petitioner's argument on this point
is flawed. From 1986 through 1990, petitioner paid Rogers
$5,942,622, and petitioner's total gross receipts for the same
period were $19,462,685. Thus, the total compensation paid to
Rogers as a percentage of petitioner's total gross revenue is
30.53 percent.
If it was actually petitioner's intent to compensate Rogers
in 1990 for his service in the prior years by paying him 18.6
percent of the gross receipts it earned in those years,
petitioner would have paid Rogers $2,116,618. This amount is the
total of 18.6 percent of each prior year's gross receipts less
the amounts petitioner actually paid to him for each of those
years, plus 18.6 percent of petitioner's 1990 gross receipts.
((18.6% x $848,403) - $66,943) + ((18.6% x $1,196,849) - $75,914)
+ ((18.6% x $2,542,912) - $431,702) + ((18.6% x $4,993,761) $928,883) + (18.6% x $9,880,760).

- 38 Respondent correctly acknowledges that it is well settled
that under some circumstances, reasonable additional compensation
of officers for services rendered in prior years is deductible
from the corporation's income for the year in which paid.
v. Ox Fibre Brush Co., 281 U.S. 115 (1930).

Lucas

However, a taxpayer

claiming that part of the payment to an officer in the current
year is for services rendered for prior periods must show:

(1)

The insufficiency of the officer's compensation in the previous
year, and (2) the amount of the current year's compensation that
was intended as compensation for that underpayment.

Pacific

Grains, Inc. v. Commissioner, 399 F.2d at 606; Estate of Wallace
v. Commissioner, supra at 554; Pulsar Components Intl., Inc. v.
Commissioner, T.C. Memo. 1996-129.

We have found as a fact that

the $500,000 increase in Rogers' base salary was intended to
compensate him for service in prior years.

Therefore, it is only

the first prong that is at issue.
Respondent denies that Rogers was undercompensated in prior
years.

In support of his position, respondent notes that in

1986, Rogers' compensation was very nearly one-half of
petitioner's taxable income, and that in 1988 and 1989, it was
more than one-half.

Moreover, respondent argues that as

petitioner paid Rogers more than $1.5 million over those 4 years,
Rogers could not have been undercompensated.

- 39 In 1984, Rogers rejected a job that offered to pay him in
excess of $1 million a year to manage a home health care
division.

Instead, Rogers went to work for petitioner in 1986,

managing its home health care business.

Petitioner paid Rogers

$66,943, $75,914, $431,702, and $928,883 in 1986, 1987, 1988, and
1989, respectively.

It is evident, therefore, that Rogers was

underpaid in each of those 4 years.
Thus, we find that petitioner has met its burden of proving
that part of the compensation paid Rogers in 1990 was intended to
compensate him for services he performed prior to 1990.
Conclusion
We come to the point where we must use our best judgment,
after weighing the evidence, to reconcile and integrate the
factors discussed above and reach our ultimate conclusion.
Because of all the factors and circumstances here present, we
have given the issue herein a close scrutiny with the result that
we agree with neither petitioner nor respondent.

On the basis of

our examination of the entire record we hold that $2.3 million
constituted reasonable compensation to Rogers for personal
services rendered to petitioner in 1990 and prior years.
Issue 2. Accuracy-Related Penalty Under Section 6662
Respondent determined an accuracy-related penalty under
section 6662 against petitioner for 1990 equal to 20 percent of
the tax deficiency.

- 40 Section 6662(a) provides that if any portion of an
underpayment of tax is attributable to any one of the factors
listed in section 6662(b), then there shall be added to the tax
an amount equal to 20 percent of the amount of the underpayment
to which it is so attributable.

Petitioner has the burden of

proving that respondent's determination of the penalty is
erroneous.

Rule 142(a); Welch v. Helvering, 290 U.S. at 115.

Petitioner did not address the section 6662 penalty issue at
trial or on brief.

Therefore, it failed to carry its burden of

proof, and we sustain respondent's determination of the penalty
for 1990.
To reflect the foregoing,
Decision will be entered
under Rule 155.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Afeae25522e440d8b. Public record. Not legal advice.