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In this case, the return on equity for 1992 was about 25 percent
under the percentage of completion method.
Respondent points out that we have calculated return on
investment by dividing taxable income (before net operating
losses) by shareholder's equity for each fiscal year. Wy'East
Color, Inc. v. Commissioner, T.C. Memo. 1996-136. Respondent
contends that, since petitioner was capitalized with $402,475,
and petitioner's taxable income was ($218,807) and $37,840 in its
fiscal years 1990 and 1991 under the completed contract method of
accounting, its return on investment was negative for those 2
years.
We are not convinced by respondent's argument. The year in
issue is 1992, not 1990 or 1991. Petitioner showed a substantial
net profit and return on investment under the percentage of
completion method for 1990 and 1991 and under either method in
1992. Dudley, Freese, and Barrett clearly received a good return
on their investment in the stock of petitioner over a period that
included the year in issue.
This factor favors petitioner.
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