- 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 NextLast modified: May 25, 2011