-27-
While petitioner declared dividends to RLLH in 1983 and 1985,
petitioner neither directly paid dividends to Mr. Leonard nor paid
dividends during the year in issue. Petitioner's compensation
scheme was bonus-heavy and salary-light, which may suggest masked
dividends. See Rapco, Inc. v. Commissioner, 85 F.3d at .
However, in evaluating the compensation payment from the
perspective of a hypothetical investor, we divide taxable income
before net operating losses by the shareholder's equity for each
fiscal year:
Taxable Income Shareholder's Return on
Fiscal Year Before NOL's Equity Investment
1986 ($141,442) $969,242 -15%
1987 3,119,831 1,786,314 175%
Petitioner's rate of return for 1987 would surely satisfy a
hypothetical investor. See Elliotts, Inc. v. Commissioner, supra
at 1247 (an average return on equity of 20 percent would satisfy an
independent investor).
The evidence bearing on this factor weighs in both directions.
Petitioner did not declare dividends in 1987, and Mr. Leonard's
compensation was bonus-heavy and salary-light. On the other hand,
a hypothetical investor would be satisfied with the annual 1987
return. We thus consider this factor neutral.
(5) Internal Consistency
The final factor focuses on whether the compensation was paid
pursuant to a structured, formal, and consistently applied program.
Bonuses not paid pursuant to such plans are suspect. Id.
Page: Previous 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 NextLast modified: May 25, 2011