Lumber City Corporation, f.k.a. Neiman-Reed Lumber and Supply Company, Inc. - Page 44

                                       - 44 -                                         

          Feb. 29, 1988               81                                              
          Feb. 28, 1989               35                                              
          Feb. 28, 1990               22                                              
          Feb. 28, 1991               16                                              
                                                                                     
               Unlike the situation presented in Elliotts, Inc. v. Commis-            
          sioner, 716 F.2d 1241 (1983), we find on the instant record that            
          petitioner's return on equity for the relevant years, regardless            
          how it is calculated, is not a reliable indicator of the reason-            
          ableness of Mr. Ruf's compensation for the years at issue.  The             
          shareholder-employee in the Elliotts, Inc. case had been the sole           
          shareholder of the taxpayer-corporation for 21 years prior to the           
          years at issue therein.  Elliotts, Inc. v. Commissioner, supra at           
          1242.  In contrast, assuming arguendo that Mr. Ruf were an                  
          independent investor, petitioner's shareholder's equity does not            
          appear to reflect accurately his investment in petitioner during            
          the relevant years.  Although the final purchase price that Mr.             
          Ruf negotiated for petitioner's stock in November 1988 was                  
          $2,045,520, its yearend shareholder's equity as reflected in its            
          financial statement for its fiscal year ended February 28, 1989,            
          was only $1,129,000.  We believe that an independent investor               
          would be concerned with the return on his or her investment of              
          $2,045,520, not the return on the shareholder's equity that                 
          reflected some prior shareholder's investment.  In addition,                
          petitioner's shareholder's equity was subject to large fluctu-              
          ations during the relevant period due to Stanislaus' purchase of            
          petitioner and its subsequent merger into it.  In sum, on the               




Page:  Previous  30  31  32  33  34  35  36  37  38  39  40  41  42  43  44  45  46  47  48  49  Next

Last modified: May 25, 2011