                          T.C. Memo. 1998-315



                        UNITED STATES TAX COURT



          LEONARD PIPELINE CONTRACTORS, LTD., Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 28985-91.                      Filed September 1, 1998.



     Marc L. Spitzer and James P. Powers, for petitioner.

     Susan E. Seabrook, for respondent.



         SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:      This case is before us on remand from the

Court    of   Appeals   for   the   Ninth   Circuit.   Leonard   Pipeline



     *
          This opinion supplements our Memorandum Findings of
Fact and Opinion in Leonard Pipeline Contractors, Ltd. v.
Commissioner, T.C. Memo. 1996-316, revd. and remanded 142 F.3d
1133 (9th Cir. 1998).
                                -2-

Contractors, Ltd. v. Commissioner, 142 F.3d 1133 (9th Cir. 1998),

revg. and remanding T.C. Memo. 1996-316.

     The issue for decision concerns the reasonableness of the

amount of compensation paid by petitioner to its president, Richard

L. Leonard, in 1987.   We previously determined in Leonard Pipeline

Contractors, Ltd. v. Commissioner, T.C. Memo. 1996-316 (Leonard

Pipeline I), that of the $1,777,800 petitioner paid Mr. Leonard in

1987, only $700,000 was reasonable and thus deductible as a section

162 business expense.1    The Court of Appeals has directed us to

explain how we arrived at our conclusion that $700,000 represented

a reasonable amount of compensation.     The Court of Appeals has

further directed us to consider that the burden of proof is on

petitioner, and to

          determine what, if any, factors, have been
          demonstrated so as to require a setting aside
          of the Commissioner's determination, the
          recognition   of   a   right   to   increased
          compensation, and the establishment of an
          amount   qualifying as     reasonable   under
          § 162(a)(1).

142 F.3d at 1136.

                         FINDINGS OF FACT

     The findings of fact are set forth in Leonard Pipeline I and

are incorporated herein by this reference.     For convenience, we

shall repeat those facts as necessary to clarify the ensuing


     1
          All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
                                         -3-

discussion.     The stipulation and exhibits are also incorporated

herein by this reference.

       Leonard Pipeline Contractors, Ltd., petitioned this Court

contesting respondent’s determination of an $807,983 deficiency in

its Federal income tax for its taxable year ended September 30,

1987, and additions to tax pursuant to section 6653(a)(1)(A) in the

amount of $40,399 and section 6653(a)(1)(B) in the amount of 50

percent of the interest on $807,983.              The deficiency was based on

respondent's    determination       that       $1,642,593       of    the   $1,777,800

petitioner deducted as compensation paid to Richard L. Leonard was

unreasonable.       Respondent subsequently conceded the additions to

tax.

       At the time petitioner Leonard Pipeline Contractors, Ltd.,

filed its petition herein, its principal place of business was in

Scottsdale, Arizona.       Petitioner filed the relevant Federal income

tax return based on a fiscal year ended September 30, 1987. (All

references hereinafter to petitioner's relevant years refer to

petitioner's fiscal years ended September 30.)

       Richard L. Leonard had extensive experience in the pipeline

industry, dating from the 1950's. In 1977, he caused petitioner to

be   established     in   Canada   and    became    its     president       and   chief

financial     and    operating     officer.        At     all        relevant     times,

petitioner's stock was wholly owned by R.L. Leonard Holdings, Ltd.

(RLLH), whose stock in turn was wholly owned by Mr. Leonard.

Petitioner became a U.S. corporation on April 18, 1985.
                                   -4-

      Between 1978 and 1987, petitioner had gross revenues of

$123,124,905 and after-tax net income of $1,705,958.         Petitioner's

primary source of income in 1985 and 1986 arose from its work on

the   All   American   Pipeline   project,2   which    involved   coating,

insulating, and wrapping 325 miles of pipeline in Texas, Arizona,

and California. In connection with this project, Mr. Leonard

personally guaranteed petitioner's $1.5 million debt to the Royal

Bank of Canada.   The All American Pipeline project was finished in

1987; thereafter petitioner continued to receive payments on the

contract but undertook no new business.

      In February 1987, Mr. Leonard began contemplating retirement.

On September 28, 1987, 2 days before the end of petitioner's tax

year, petitioner's board of directors (consisting of Mr. Leonard

and his son) voted to pay Mr. Leonard a $1.68 million bonus in

addition to his $97,800 salary for the year.          The board's decision

was purportedly based on several considerations, including: (1) Mr.

Leonard's efforts in obtaining the All American Pipeline project;

(2) Mr. Leonard's development of a new insulation process; and (3)




      2
          On Sept. 19, 1991, Mr. Leonard ultimately pled guilty
to a criminal information filed against him in the District Court
for the Southern District of Texas for obtaining the All American
Pipeline contract through fraud. He was sentenced to 3 years of
unsupervised probation and fined $1,000.
                               -5-

the fact that petitioner did not pay Mr. Leonard any compensation

in 1985 or 1986.3

     3
          The minutes of the board meeting stated, in pertinent
part:

     1.   The President, through his efforts as early as
     1984 and resultant personal and business contacts
     acquired from those efforts, was able to have the
     corporation placed on the bidding list for All American
     Pipeline Company.

     2.   The President[,] having acquired expertise in the
     coating and insulation of pipe in Saudi Arabia during
     1978 through to 1980[,] was able to develop a new
     insulation process starting in 1984, which process was
     ultimately successful in securing the All American
     contract (the “contract”).

     3.   The corporation, notwithstanding the successful
     insulating process, would have been unable to complete
     the contract without the financial backing of a public
     corporation or a joint venture partner with financial
     backing. The President, through his thirty years
     association with the President of the Permanent
     Concrete Ltd., was able to secure a financially strong
     joint venture partner for the corporation, which
     partner secured for the joint venture Five Million
     Dollars ($5,000,000) of financing and obtained
     approximately Twenty-Three Million Dollars
     ($23,000,000) of bonding. This was accomplished
     without giving up more than fifty percent of the
     participation which would have otherwise been the case.

     4.   The President personally guaranteed the
     corporation’s share of the bank financing and
     indemnified the joint venture partner, Anchor Wate, a
     subsidiary of Permanent Concrete Ltd., in respect of
     the bonding and further pledged his assets in support
     of the guarantee.

     5.   The President has received no compensation from
     the corporation for 1985 and 1986. In addition, the
     corporation was unable to pay compensation to its
     President in those years due to Royal Bank of Canada
     credit line restrictions, which credit line was also
                                                   (continued...)
                                      -6-

     On its 1987 fiscal year return, petitioner deducted the amount

of salary and bonus ($1,777,800) it paid Mr. Leonard.

     In   1985,   Mr.     Leonard    and     his   wife   initiated    divorce

proceedings,   and   in   1987,     they    divorced.     Pursuant    to   their

property settlement, Mr. Leonard provided his former wife money and

property valued at $1.68 million.

                                    OPINION

     The U.S. Court of Appeals for the Ninth Circuit has directed

us to further explain the method we employed to arrive at $700,000

as reasonable compensation for Mr. Leonard in 1987.                    Leonard

Pipeline Contractors, Ltd. v. Commissioner, 142 F.3d at 1136. With

the discussion that follows, we attempt to provide the Court of

Appeals with "a trail" to follow as to how we reached our prior

conclusion. See Akers v. Commissioner, 798 F.2d 894, 897 (6th Cir.

1986), revg. and remanding T.C. Memo. 1984-208; Estate of Gilford

v. Commissioner, 88 T.C. 38, 50 (1987); Symington v. Commissioner,

87 T.C. 892, 904 (1986).




     3
      (...continued)
     personally guaranteed by him. Not until now, with the
     contract completed and the benefits from subsequent
     grading and fencing contracts awarded being realized,
     is the corporation in a position to adequately
     compensate its President for his unique and extremely
     profitable contribution to the corporation.
                                        -7-

Burden of Proof

        "The burden of proof remains on the Taxpayer to show that the

Commissioner's         determination     was     wrong."      Leonard          Pipeline

Contractors, Ltd. v. Commissioner, 142 F.3d at 1136.                    "This burden

is a burden of persuasion; it requires * * * [petitioner] to show

the merits of [its] claim by at least a preponderance of the

evidence."      Rockwell v. Commissioner, 512 F.2d 882, 885 (9th Cir.

1975), affg. T.C. Memo. 1972-133.             Where the Commissioner has made

a deficiency determination denying the taxpayer's entitlement to a

claimed deduction (such as here), "the taxpayer has 'the burden of

producing enough evidence to rebut the deficiency determination and

the burden of persuasion in substantiating a claimed deduction'."

Goldberg v. United States, 789 F.2d 1341, 1343 (9th Cir. 1986)

(quoting Valley Title Co. v. Commissioner, 559 F.2d 1139, 1141 (9th

Cir. 1977), revg. and remanding T.C. Memo. 1975-48).

        In the instant case, petitioner produced sufficient evidence

to   overcome    the     presumption     of    correctness         of   respondent's

determination.       We were convinced that petitioner was entitled to

a greater compensation deduction than that allowed by respondent.

Ample     evidence     demonstrated     the    magnitude      of    Mr.       Leonard's

contributions     to     petitioner:      (1)     Mr.    Leonard        was   directly

responsible      for     petitioner's     growth        and   success--providing

invaluable services to the company by obtaining contracts and

generating business for petitioner; (2) over its 10 years of

existence, petitioner had total gross revenues of $123,124,905 and
                                       -8-

after-tax net income of $1,705,958, which was all attributable to

Mr. Leonard's efforts; (3) the board of directors minutes supported

the notion that in paying Mr. Leonard in 1987, petitioner was

attempting in part to compensate him for services performed in 1985

and 1986; and (4) petitioner never provided Mr. Leonard with

retirement benefits, which an individual in his position justly

deserved.    These four factors led us to the conclusion that we must

set aside respondent's determination in the notice of deficiency.

Because,    in    our   opinion,     petitioner       had    proven      respondent’s

determination incorrect, we were forced to decide the proper amount

of reasonable compensation on the basis of the entire record before

us.   See Pepsi-Cola Bottling Co. v. Commissioner, 61 T.C. 564, 568

(1974), affd. 528 F.2d 176 (10th Cir. 1975).

Section 162(a)(1) Deduction

        Section    162(a)(1)   permits       a   corporation        to    deduct    “a

reasonable       allowance   for   salaries      or    other   compensation        for

personal services actually rendered” as an ordinary and necessary

business expense.         Compensation payments are deductible under

section 162(a)(1) if they are reasonable and paid “purely for

services” rendered to the business.              Sec. 1.162-7(a), Income Tax

Regs.    Bonuses paid to employees are deductible only when made in

good faith and as additional compensation for services actually

rendered    by    the   employees,    provided        that   when     added   to   the

salaries, they do not exceed reasonable compensation for the

services rendered.       RAPCO, Inc. v. Commissioner, T.C. Memo. 1995-
                                         -9-

128, affd. 85 F.3d 950 (2d Cir. 1996); sec. 1.162-9, Income Tax

Regs.     Courts generally focus on the reasonableness requirement.

Elliotts, Inc. v. Commissioner, 716 F.2d 1241, 1243 (9th Cir.

1983), revg. and remanding T.C. Memo. 1980-282.                "The inquiry into

reasonableness is a broad one and generally subsumes the inquiry

into compensatory intent." Summit Publg. Co. v. Commissioner, T.C.

Memo. 1990-288.

Five-Factor Test

        The U.S. Court of Appeals for the Ninth Circuit uses a five-

factor test, as enumerated in Elliotts, Inc. v. Commissioner, supra

at 1245-1248, to determine reasonableness of compensation: (1) The

employee’s     role     in    the   company;     (2)   a     comparison   of    the

compensation paid to the employee with the compensation paid to

similarly     situated       employees    in    similar    companies;     (3)   the

character and condition of the company; (4) whether a conflict of

interest exists that might permit the company to disguise dividend

payments     as   deductible        compensation;      and    (5)   whether     the

compensation      was   paid    pursuant   to    a   structured,    formal,     and

consistently applied program.            No single factor is dispositive.

Pacific Grains, Inc. v. Commissioner, 399 F.2d 603, 606 (9th Cir.

1968), affg. T.C. Memo. 1967-7.

        A detailed discussion of these factors is set forth in Leonard

Pipeline I.       We will briefly summarize herein our findings with

respect to each factor, and, where appropriate, provide some

elaboration.
                                       -10-

     First, there was little doubt that Mr. Leonard was essential

to petitioner's success from its inception and indispensable to

petitioner's     business.    Moreover,          he     personally     guaranteed

petitioner’s $1.5 million debt to the Royal Bank of Canada, which

was crucial to the All American Pipeline project.                  See Owensby &

Kritikos, Inc. v. Commissioner, 819 F.2d 1315, 1325 n.33 (5th Cir.

1987), affg. T.C. Memo. 1985-267. Although during 1987 Mr. Leonard

was in the process of retiring and petitioner's only activity was

to   report     previously    earned          income,     these      facts   were

inconsequential in light of Mr. Leonard's experience and past

services.

     Second, both parties relied upon expert testimony and written

opinions for purposes of determining external comparison.                     The

range   of   figures   offered    by    these     experts    was     unreasonably

disparate.     Respondent's      expert,       Emmett    James     Brennan   III,

determined the highest average amount of total compensation for Mr.

Leonard for 1987 to be $160,710.              He also determined that in the

event we concluded that Mr. Leonard was entitled to a retirement

benefit, an additional $167,450 should be allocated for that

benefit.     One of petitioner's experts, Michael Wagner, offered a

$180,000 to $200,000 range for Mr. Leonard's 1987 base salary and

a $1.2 million to $2 million range for Mr. Leonard's 1987 bonus.

Petitioner's other expert, Michael Kesner, concluded that the total

amount of compensation petitioner paid Mr. Leonard in 1987 was

reasonable because, according to Mr. Kesner, among other reasons,
                                    -11-

Mr. Leonard was undercompensated by $2,050,000 to $2,700,000 in

prior years.      Mr. Kesner suggested an additional $296,000 should

have been paid to Mr. Leonard as retirement benefits.

       We   evaluate   the   opinions   of   experts   in   light   of   their

demonstrated qualifications and when considered with the other

evidence in the record.        Anderson v. Commissioner, 250 F.2d 242,

249 (5th Cir. 1957), affg. in part and remanding in part T.C. Memo.

1956-178.      We have broad discretion to evaluate "'the overall

cogency of each expert's analysis.'"         Sammons v. Commissioner, 838

F.2d 330, 334 (9th Cir. 1988) (quoting Ebben v. Commissioner, 783

F.2d 906, 909 (9th Cir. 1986), affg. in part and revg. in part T.C.

Memo. 1983-200), affg. in part and revg. in part T.C. Memo. 1986-

318.     We may accept or reject an expert's opinion in toto, or we

may pick and choose the portions of the opinion which we decide to

adopt.      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); Parker v. Commissioner, 86 T.C. 547, 562

(1986); Pabst Brewing Co. v. Commissioner, T.C. Memo. 1996-506.

       Here, the experts reached conclusions which patently favored

their respective clients, and their reports were designed to

support their conclusions.         Previously, we have observed that

experts may lose their usefulness and credibility when they merely

become advocates for one side.           See, e.g., Buffalo Tool & Die

Manufacturing Co. v. Commissioner, 74 T.C. 441, 452 (1980).                 We

have not hesitated to reject expert testimony when we find that the
                                       -12-

methods presented by the experts constitute advocacy.                     Laureys v.

Commissioner, 92 T.C. 101, 127-129 (1989); see also Estate of Halas

v. Commissioner, 94 T.C. 570, 578 (1990).

     With     regard   to    the     instant    case,      in    some     instances,

petitioner's experts were nothing more than advocates for their

client and in those instances, we dismissed their conclusions;

however, in other instances, we found the experts' testimony

credible and thus accepted that part, as discussed infra.

     Our disagreement with the analyses performed by petitioner's

experts was limited to their determination of exaggerated figures--

Mr. Wagner advocated a bonus in the $1.2 million to $2 million

range, and Mr. Kesner believed Mr. Leonard was undercompensated by

$2,050,000    to   $2,700,000.       With    regard   to   the    opinion    of   Mr.

Brennan, respondent's expert, we rejected it because Mr. Brennan

relied upon information from businesses different than petitioner's

in reaching a result that understated reasonable compensation.

     Notwithstanding the aforesaid, given the relative proximity of

the figures between petitioner's and respondent's experts with

respect to the base salary and retirement components, we found both

Mr. Wagner's base salary figures ($180,000 to $200,000) and Mr.

Kesner's    retirement      figure    ($296,000)      to    be    reasonable,     as

discussed infra.

     Third,     Mr.    Leonard's       new    insulation        process     promoted

petitioner's business.        Also, the ratio of Mr. Leonard's bonus to

petitioner's taxable income before the compensation deduction was
                                        -13-

34   percent    ($1,680,000          divided    by   $4,922,631),         which      was

appropriate     in     light    of     Mr.     Leonard's       work     history      and

undercompensation in 1985 and 1986.              However, during the year in

issue, Mr. Leonard was attempting to wind down the business.

     Fourth,     because       Mr.    Leonard     indirectly          owned   all    of

petitioner's stock, a potential for conflict of interest clearly

existed.    Thus, we carefully scrutinized the reasonableness of the

compensation    paid    to     him.     See    Owensby     &   Kritikos,      Inc.    v.

Commissioner, supra at 1322-1324; see also Nor-Cal Adjusters v.

Commissioner, 503 F.2d 359, 361 (9th Cir. 1974), affg. T.C. Memo.

1971-200.     Mr. Leonard's compensation was bonus-heavy and salary-

light, which could have suggested masked dividends.                       See RAPCO,

Inc. v. Commissioner, 85 F.3d at 955.                Although petitioner paid

dividends to RLLH4 in prior years, it did not pay any dividends in

1987. But petitioner's rate of return for 1987 (175 percent) would

have satisfied a hypothetical investor.

     Fifth, petitioner did not determine Mr. Leonard's bonus on the

basis of any consistently applied formula or plan.                     The amount of

     4
          Petitioner paid RLLH a Can$743,828 dividend in 1983,
and an Can$878,787 dividend in January 1985 out of petitioner's
capital account. Under Canadian law at the time, when a dividend
was paid out of a capital account, the distribution was not
taxable because it represented the nontaxable portion of capital
gain.
     William T. Perks, a Canadian chartered accountant and
attorney, advised petitioner and Mr. Leonard with regard to tax
and legal matters. Before Apr. 18, 1985 (when petitioner became
a U.S. corporation), it appears that it was financially
advantageous for petitioner to declare dividends under Canadian
law.
                                             -14-

Mr.    Leonard's      bonus     was       not     set   according     to    any   business

considerations; rather, it was meant to recoup from petitioner an

amount equal to the amount of money and property awarded to his

estranged      wife    in     their        divorce      ($1.68    million).        Indeed,

petitioner paid Mr. Leonard's wife $3,000 a month beginning at

least in February 1986 as part of Mr. Leonard's support obligation

during    the    pendency           of    their     marriage      dissolution      action.

Interestingly, because Mrs. Leonard did not work for petitioner,

the amount paid to her would not have been deductible by petitioner

and would have been taxable to Mr. Leonard as a constructive

dividend.

       Raising a salary (or in this case setting a bonus) towards the

end of the year has been held to be an indication that the salary,

or    bonus,    is    really    a        distribution     of     earnings    rather      than

additional       compensation.             See,     e.g.,      Rich   Plan,       Inc.     v.

Commissioner, T.C. Memo. 1978-514. This is particularly true where

no dividends have been paid.                 We believed that because the board

(consisting of Mr. Leonard and his son) passed the resolution 2

days before the end of petitioner's fiscal year, and shortly before

Mr. Leonard's retirement, petitioner, to a certain extent, made a

deliberate effort to distribute its earnings to Mr. Leonard.                               On

the other hand, petitioner's 1987 compensation to Mr. Leonard did

partially      represent       an    attempt       to   rectify    his     1985   and    1986

undercompensation.
                                         -15-

Amount of Reasonable Compensation

       After considering and weighing the five Elliotts factors, we

were faced with a most difficult dilemma because no clear-cut

"answer" was apparent.              Although petitioner proved respondent's

determination to be too low, petitioner did not show the totality

of the amount paid to Mr. Leonard to be reasonable.                  Accordingly,

we were forced to decide for ourselves an amount which constituted

a reasonable compensation figure on the basis of the record before

us.    See Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir.

1976), affg. T.C. Memo. 1974-285; Acme Constr. Co. v. Commissioner,

T.C. Memo. 1995-6.           And in this regard, we agree with the Court of

Appeals      for     the    Ninth   Circuit's   observation   that   determining

"reasonableness" of compensation depends "to a degree on the eye of

the beholder." Leonard Pipeline Contractors, Ltd. v. Commissioner,

142 F.3d at 1135. Any attempt to determine reasonable compensation

with mathematical precision is impossible, see, e.g., Jones Bros.

Bakery, Inc. v. United States, 188 Ct. Cl. 226, 245, 411 F.2d 1282,

1294       (1969),    and    petitioner's   experts   testified      as   to   this

difficulty.5

       On the basis of all of the evidence before us, we were

convinced, and we remain convinced, that the $1,777,800 petitioner

paid Mr. Leonard in 1987 was unreasonable.               In our opinion, the

       5
          Mr. Wagner admitted that "bonus awards, in my
experience, have been subjective", and Mr. Kesner testified that
"This is not--and I repeat not--an exercise in mathematics. It
is an exercise in judgment."
                                  -16-

amount petitioner paid to Mr. Leonard in 1987 was chosen to a large

extent on the basis of the amount Mr. Leonard paid his wife in

connection with their divorce settlement. Moreover, it is clear to

us that, to a certain extent, the board of directors made a

deliberate   effort   to   distribute    petitioner's   earnings   to    Mr.

Leonard by paying him the $1.68 million bonus 2 days before the end

of petitioner's tax year.      That being said, however, we believed,

and we still believe, that a portion of the $1.68 million bonus

petitioner paid Mr. Leonard was intended to compensate him for past

and other valuable services he rendered to petitioner, and in that

regard that portion constituted reasonable compensation.

      We concluded that $700,000 represented a reasonable amount of

total compensation for Mr. Leonard for 1987. This amount comprised

$200,000 as a salary, $195,000 as a bonus, and $296,000 as a lump-

sum   retirement   payment.6      See    Pepsi-Cola     Bottling   Co.   v.

Commissioner, 61 T.C. at 568.      We rounded the $395,000 salary and

bonus to $400,000, and the $296,000 retirement figure to $300,000.

      We determined the reasonableness of $395,000 (rounded to

$400,000) as a salary and bonus on the basis of the following

considerations: (1) All of the experts herein agreed that Mr.


      6
          In the context of valuations, we have determined that
the figure arrived at need not be one as to which there is
specific testimony if the amount is within the range of values
that may properly be arrived at giving consideration to all the
evidence. Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir.
1976), affg. T.C. Memo. 1974-285.
                                         -17-

Leonard was undercompensated during prior years; (2) Mr. Leonard

received no prior reward for his personal efforts in obtaining the

All American Pipeline contract; and (3) Mr. Leonard received no

prior reward for development of the new insulation process.

     Both petitioner's and respondent's experts agreed that Mr.

Leonard was undercompensated in 1985 and 1986.                  Yet, despite that

conclusion, respondent's expert, Mr. Brennan, made no adjustments

to Mr. Leonard's 1987 base salary figure.                  Rather, Mr. Brennan

opined that Mr. Leonard was entitled to $160,710 in 1987, even

though he received only $162,252 in 1985 and $142,748 in 1986 from

joint ventures involving petitioner.                 Thus, Mr. Brennan's 1987

figure failed to reflect the fact that Mr. Leonard was entitled to

a greater base salary.

     Petitioner's expert Mr. Wagner adjusted his 1987 base salary

upward to a $180,000 to $200,000 range to reflect the fact that Mr.

Leonard    was    entitled    to    a    greater    base   salary   than    he   had

previously received.         We believed an adjustment for the 1987 base

salary to $200,000 was appropriate and reasonable.                      Further, we

believed    Mr.   Leonard     should      have   been   given    credit    for   the

difference between the amount of his 1985 and 1986 base salaries

and $200,000, reflecting Mr. Leonard's undercompensation for those

years.     (The 1985 and 1986 base salaries were short by $37,748

($200,000    -    $162,252)        and    $57,252    ($200,000      -    $142,748),

respectively.)        Thus, Mr. Leonard was entitled to $95,000 to

reflect his undercompensation for 1985 and 1986.                        Finally, we
                                          -18-

believed a $100,000 bonus was appropriate and reasonable to reflect

Mr.    Leonard's       personal    efforts    at    securing   the     All    American

Pipeline contract and guaranteeing the loan to the Royal Bank of

Canada, as well as his development of the pipeline insulation

process. Therefore, we concluded that $395,000 ($200,000 + $95,000

+    $100,000)    represented       an   appropriate       total   amount     for     Mr.

Leonard's salary and bonus for 1987, and as stated, rounded this

amount to $400,000.

       We also concluded that $296,000 paid to Mr. Leonard was

appropriate and, after rounding to $300,000, represented reasonable

compensation as a lump-sum retirement payment.                     We reached this

conclusion on the basis of the fact that petitioner did not offer

Mr. Leonard any retirement or pension benefits, a feature common,

if    not    expected,    for     someone    of    Mr.   Leonard's    position      with

petitioner.           High compensation is reasonable when there is a

corresponding lack of fringe benefits such as pension plans or

stock       options    which    might    normally    be    expected.         Rutter    v.

Commissioner, 853 F.2d 1267, 1274 (5th Cir. 1988), affg. T.C. Memo.

1986-407.

       Both     parties'       experts    provided       figures     for   retirement

benefits. Petitioner's expert Mr. Kesner believed that Mr. Leonard

was entitled to a lump-sum payment for retirement benefits of

$296,000.       Respondent's expert, Mr. Brennan, stated that in the

event the Court determined that Mr. Leonard is entitled to a

retirement benefit, he would allocate $167,450 for that benefit.
                              -19-

We found Mr. Kesner's figure more reasonable than Mr. Brennan's

figure.   Mr. Leonard dedicated much of the latter part of his

career to petitioner's success, often with little or no direct

compensation or security for his future.    Mr. Brennan's retirement

figure would not have even represented 1 year's salary (under our

analysis).

     We therefore concluded, and still conclude, that $700,000

represented a reasonable amount of total compensation (salary,

bonus, and retirement benefits) for Mr. Leonard in 1987.



                                           Decision will be entered

                                     as    previously    entered   on

                                     February 7, 1997.
