                         T.C. Memo. 2001-197



                       UNITED STATES TAX COURT



             DAMRON AUTO PARTS, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5661-00.                         Filed July 30, 2001.


     Ronald J. Russo, for petitioner.

     William R. McCants, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:    By notice dated February 17, 2000, respondent

determined deficiencies and section 6651(a)(1) additions to

petitioner’s Federal income taxes as follows:

                                        Sec. 6651(a)(1)
               Year        Deficiency      Addition

               1993         $269,956       $63,464
               1994          502,174        24,859
               1995          482,736          --
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All section references are to the Internal Revenue Code in effect

for the years in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure.    The issues are whether

petitioner is entitled to section 162 deductions relating to

compensation payments in excess of the amounts determined by

respondent and whether petitioner is liable for section

6651(a)(1) additions to tax.

                          FINDINGS OF FACT

I.   Background

      Petitioner was incorporated in 1982.   It had its principal

place of business in Florida when the petition was filed.      From

1982 until 1992, Leonard A. Damron, III, and his sister, Sharon

Owen, owned 51 and 49 percent, respectively, of petitioner’s

stock.    Mr. Damron and Mrs. Owen’s husband, Ronald, operated

petitioner, which recycled and sold used auto parts.    In 1984,

petitioner’s stock was worth approximately $200,000.    On August

12, 1992, Mrs. Owen sold her stock in petitioner and related

corporations to Mr. Damron for $250,000, and Mr. Owen entered

into an employment contract with petitioner.    On October 31,

1995, petitioner declared and paid a $7,589 dividend to Mr.

Damron.    In 1998, Mr. Damron sold, for $12,500,000, all of

petitioner’s stock to, and became an employee of, LKQ Corporation

(LKQ), a national provider of recycled auto parts.    Petitioner’s

gross receipts were as follows:
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                          Year             Amount

                          1993           $9,108,625
                          1994           10,552,652
                          1995           11,355,749
                          1998           13,000,000

II.   Operations

      Mr. Damron upgraded petitioner’s business from a basic

salvage yard to a modern state-of-the-art showroom.   Under his

leadership, petitioner purchased wrecked cars from insurance

companies and auctions, dismantled the cars, tested and cleaned

the parts, indexed the parts in a computer data base, and shelved

the parts for sale.   Thus, the parts could be sold to customers

without employees’ scavenging the salvage yard.

      From 1984 through 1995, Mr. Damron typically worked 90 to

100 hours per week, did not go out for lunch, and took only three

vacations of a few days each.    Mr. Damron attended the auctions,

purchased wrecked cars, priced all the parts, determined when to

crush dismantled vehicles, arranged the sale of crushed hulks,

negotiated with vendors, reviewed accounts receivable and

payable, and designed petitioner’s facility.

      During the years in issue, petitioner had 40 to 60

employees.   Mr. Damron interviewed, hired, evaluated, and

terminated the employees; trained and supervised the dismantlers;

and was responsible for employee benefits, health plans, bonuses,

workers’ compensation, insurance, employee safety, and hazardous

waste disposal.
                                - 4 -

       On October 24, 1994, Mr. Damron and his wife entered into a

Marital Settlement Agreement which stated that petitioner’s stock

was worth $1,200,000.    In 1995, Mr. Damron and his wife were

divorced as a result, in part, of his grueling work schedule.    In

July 1996, Mr. Damron and his wife were remarried.

III.    Compensation

       During 1985 through 1991, petitioner’s accountant formulated

compensation for Mr. Damron and Mr. Owen reflecting base salaries

and bonuses.    Mr. Damron’s bonus was 10 percent of wholesale

sales.    Petitioner paid Mr. Damron only a portion of the

compensation thus formulated, resulting in underpayments of

$191,251, $278,963, $359,903, $430,370, $437,280, $587,340, and

$364,332, relating to 1985 through 1991, respectively.    Effective

February 20, 1990, Mr. Damron, his wife, and Mr. and Mrs. Owen

signed a Capital Accumulation Verification (Verification)

forgiving any debts petitioner owed them.

       During 1992 through 1995, petitioner’s accountant formulated

Mr. Damron’s bonus as 10 percent of wholesale sales or, if less,

50 percent of any excess of petitioner’s income (i.e., after

wages) over $500,000, or 25 percent of any such excess over

$250,000.    Petitioner’s payments to Mr. Damron and gross profits

were as follows:
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                              Payment for       Total      Petitioner’s
Year     Salary    Bonus     Past Services   Compensation Gross Profits

1993 $480,000     $387,073      $482,927     $1,350,000    $3,779,338
1994   961,500     520,648       354,966      1,837,114     4,693,741
1995 1,000,000     496,386       406,160      1,902,546     5,080,865

During the years in issue, Mr. Damron was not a participant in

any pension, profit-sharing, or executive compensation plan.

       In 1998, pursuant to his sale of petitioner’s stock to LKQ,

Mr. Damron became vice president (Southeast Region) of LKQ.         In

addition, he remained president of petitioner.       Mr. Damron earned

about $500,000 per year, which included base compensation of

$250,000 per year and additional compensation dependent on

revenue generated in the region.       He also received incentive

compensation based upon “corporate and regional financial and

operating objectives”.       The Southeast Region generated about

$90,000,000 annually.       As an LKQ employee, Mr. Damron was

entitled to 30 days of vacation every year.

IV.    Other Corporations

       During the years in issue, Mr. Damron was the sole

shareholder of the following nine corporations:       Damron

Management Corporation; Damron Used Auto Parts Stores, Inc.;

Yuppie Euro, Inc.; Damron Service, Inc.; Damron Land Holdings,

Inc.; Damron Trucking, Inc.; Damron Parts Replacement Corp.;

Damron Used Auto Parts of Gainesville, Inc.; and Damron Auto

Parts of Georgia, Inc.       He rendered 10 percent of his services to

these corporations but did not receive salary from them.
                                 - 6 -

V.   Returns

      On July 15, 1994, and July 17, 1995, petitioner’s respective

1993 and 1994 returns were due (i.e., after extensions).    On

November 18, 1994, and August 2, 1995, respondent received the

respective 1993 and 1994 returns.    Respondent determined that Mr.

Damron’s compensation should be adjusted as follows:

                Year      Amount Allowed       Adjustment

                1993           $468,946         $881,054
                1994            492,373        1,344,741
                1995            517,004        1,385,532

                                OPINION

I.   Compensation

      Section 162(a) allows a deduction for salary expense if the

amount is reasonable and the expense relates to compensation for

services actually rendered.     Elliotts, Inc. v. Commissioner, 716

F.2d 1241, 1243 (9th Cir. 1983), revg. T.C. Memo. 1980-282.      An

expense “may be deductible as reasonable compensation for current

and past services rendered.”     R. J. Nicoll Co. v. Commissioner,

59 T.C. 37, 50 (1972).

      We note at the outset that 10 percent of the compensation

paid, during the years in issue, to Mr. Damron, was directly

attributable to services performed for the nine other

corporations he controlled.    These amounts should have been paid

by such corporations and, accordingly, are not deductible by
                                - 7 -

petitioner.   Thus, we must determine whether petitioner is

entitled to deduct 90 percent of the compensation paid.

     Citing petitioner’s payment of only one dividend over 16

years, respondent contends that the disallowed payments were not

reasonable compensation.    Dividend history, however, is only one

of many factors in determining reasonableness of compensation.

See Estate of Wallace v. Commissioner, 95 T.C. 525, 553 (1990),

affd. 965 F.2d 1038 (11th Cir. 1992).   During the years in issue,

Mr. Damron performed several functions for petitioner in numerous

roles (i.e., purchasing, selling, supervising, etc.).    He worked

incessantly and exercised sound business judgment which had a

direct and significant impact on petitioner’s profitability.    Mr.

Damron transformed petitioner’s business from a basic salvage

yard to a modern state-of-the-art showroom.   Petitioner’s

facility, according to respondent’s expert, “is reported to be

the largest of its kind.”   In addition, our analysis of the

return on equity in petitioner reveals that petitioner had a high

rate of return despite its failure to pay dividends.    See

Elliotts, Inc. v. Commissioner, supra at 1244 (rejecting the

automatic dividend rule).   Accordingly, Mr. Damron’s

qualifications; the nature, extent, and scope of his

responsibilities; and the size and complexities of petitioner’s

business all lead us to conclude that his compensation was

reasonable.   See Estate of Wallace v. Commissioner, supra.
                                 - 8 -

     From its incorporation until its purchase by LKQ, petitioner

consistently and rapidly increased in fair market value (FMV).

Under the guidance and management of Mr. Damron, a corporation

valued at $200,000 in 1984 grew to $12,500,000 in 1998.

Respondent’s expert opined that FMV increased from $3,755,510 in

1993 to $6,267,846 in 1995.1    Moreover, respondent’s expert found

that the maximum compensation (i.e., including bonus) should be

$786,000, $1,145,000, and $1,144,000, relating to the respective

years in issue (i.e., 68, 133, and 121 percent more than

respondent allowed, respectively).

     In essence, Mr. Damron rendered extensive and intensive

services to petitioner that, according to petitioner’s expert,

resulted in a compound rate of return, from 1984 to 1998, of more

than 39 percent per year.     Respondent’s expert believed that

investors in a firm like petitioner would expect a 14.3-percent

return on their investment.    We conclude that an independent



     1
      In an addendum submitted at trial, respondent’s expert
explained that when he prepared his original report he did not
know petitioner had been sold in 1998 for $12,500,000. The
expert stated: “Given the subsequent price paid for DAP [i.e.,
petitioner], our original returns analysis underestimated the
value of DAP and, thus, overestimated the compensation available
to Mr. Damron between 1993 and 1995.” Consequently, the expert
presented an alternative analysis indicating that FMV increased
from $7,357,619 in 1993 to $9,667,382 in 1995. The expert added,
however, that “The analysis based on the subsequent sale of DAP
does not alter the conclusions in our original report”.
Therefore, we do not accord great weight to the expert’s
alternative analysis and accept his original conclusion that FMV
increased 67, rather than 31, percent from 1993 to 1995.
                               - 9 -

investor would have been quite satisfied with petitioner’s

consistent growth, solid management, and other indications that

gains would continue.

     Respondent contends that petitioner’s accountant performed

yearend planning “to severely limit petitioner’s taxable income”.

The bonus calculations were performed at yearend because it was

then that petitioner’s accountant had all the information

required to determine the appropriate amount of the payments.

Our focus is on the reasonableness of the amounts, not the

payment dates, of the compensation.    The timing of the payments

does not lead us to conclude that Mr. Damron’s compensation was

unreasonably high.   See Owensby & Kritikos, Inc. v. Commissioner,

819 F.2d 1315, 1323, 1329 (5th Cir. 1987) (stating that “No

single factor is decisive of the question * * * [although] such

substantial bonuses declared at year-end when the earnings of a

business are known usually indicate the existence of disguised

dividends”), affg. T.C. Memo. 1985-267.

     Respondent also contends that the amounts he allowed are “in

line with” Mr. Damron’s compensation as an LKQ employee.    All the

evidence presented at trial, however, established that Mr.

Damron’s responsibilities to LKQ were fewer, less stressful, and

less time-consuming than his previous work for petitioner.    In

short, LKQ paid Mr. Damron less than petitioner paid because at

LKQ he delegated more of his responsibilities.
                               - 10 -

      Respondent contends that petitioner did not pay Mr. Damron

to make up for past undercompensation because he had signed the

Verification.   We conclude that the Verification is irrelevant

and that it did not preclude petitioner from paying for past

services.   See Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 119

(1930) (stating that “compensation for past services, it being

admitted that it was reasonable in amount in view of the large

benefits which the corporation had received as the fruits of

these services, the corporation had a right to pay, if it saw

fit”).   Even if portions were not attributable to past services,

our conclusion would not change.

      Accordingly, we hold that Mr. Damron’s salary during the

years in issue was reasonable.

II.   Additions to Tax

      Section 6651(a)(1) imposes an addition to tax for failure to

file a required return on the date prescribed, unless it is shown

that such failure is due to reasonable cause and not willful

neglect.    Petitioner’s 1993 and 1994 returns were due on July 15,

1994, and July 17, 1995, but not filed before November 18, 1994,

and August 2, 1995, respectively.   Petitioner presented no

evidence relating to this issue and did not address it on brief.

It has not been shown that such failure is due to reasonable

cause and not willful neglect.   Accordingly, petitioner is liable

for the section 6651(a)(1) additions to tax.
                             - 11 -

     Contentions we have not addressed are moot, irrelevant, or

meritless.

     To reflect the foregoing,



                                        Decision will be entered

                                   under Rule 155.
