PMT, INC. - Page 23

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               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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