- -23 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 thePage: Previous 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Next
Last modified: May 25, 2011