- -23
Petitioner never paid dividends from the date of its
inception through the years at issue. Mr. Blumberg testified
that petitioner did not pay dividends because petitioner was a
growth company. According to Mr. Blumberg, growth companies
generally do not pay dividends because they are not attempting to
strengthen their stock values or attract new stockholders but
rather growth companies are desirous of retaining capital. In
Elliotts, Inc. v. Commissioner, 716 F.2d at 1247, the Court of
Appeals stated:
If the bulk of the corporation's earnings are being
paid out in the form of compensation, so that the
corporate profits, after payment of the compensation,
do not represent a reasonable return on the
shareholder's equity in the corporation, then an
independent shareholder would probably not approve of
the compensation arrangement. If, however, that is not
the case and 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.
[Fn. ref. omitted.]
Petitioner's return on equity, calculated as net income
after taxes per petitioner's Federal income tax returns, divided
by shareholder equity at the beginning of the year, was 150
percent for the year at issue, while for the 2 previous fiscal
years, petitioner's return on equity was 45 and 50 percent,
respectively. Respondent does not dispute that the return on
equity for 1990 was "excellent", but argues that the return on
equity from the taxable year ended July 31, 1988, to the taxable
year ended December 31, 1992, was not as impressive. While the
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