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Courts have compared sales, net income, and capital value to
amounts of compensation in deciding whether compensation is
reasonable. Elliotts, Inc. v. Commissioner, supra at 1241;
Mayson Manufacturing v. Commissioner, supra.
For the year in issue, Officers' salaries were 27.3 percent
of gross receipts and 60.5 percent of gross income. Officers’
salaries were 82.4 of book net income (before deducting Officers'
compensation) and 82.4 percent of taxable net income (before
deducting Officers' compensation).
These percentages are reasonable in light of the
qualifications of the Officers and the nature, extent, and scope
of their work, and the years of prior undercompensation. During
1983, petitioner paid the Officers less compensation than they
were entitled to, while they helped petitioner increase its gross
sales from $2,671,061 in 1983 to $10,693,635 in 1985. We also
find relevant the fact that petitioner reported more than
$995,460 in taxable income during the subject year,
notwithstanding its payment of large compensation to the
Officers. This factor favors petitioner.
f. General Economic Conditions
This factor helps to determine whether the success of a
business is attributable to general economic conditions, as
opposed to the efforts and business acumen of the employees.
General economic conditions may affect a business' performance
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