- 25 -
Corporations, however, are not required to pay dividends.
Shareholders may be equally content with the appreciation of
their stock caused, for example, by the retention of earnings.
Owensby & Kritikos, Inc. v. Commissioner, supra; Elliotts, Inc.
v. Commissioner, supra; Home Interiors & Gifts, Inc. v.
Commissioner, 73 T.C. at 1162 (1980).
Petitioner has a history of regularly declaring and paying
dividends. In reviewing the reasonableness of an employee's
compensation, we often apply a hypothetical independent investor
standard to determine whether a shareholder has received a fair
return on investment after the payment of the compensation in
question. Owensby & Kritikos, Inc. v. Commissioner, supra at
1326-1327; Elliotts, Inc. v. Commissioner, 716 F.2d at 1244;
Medina v. Commissioner, T.C. Memo. 1983-253; see also Rev. Rul.
79-8, 1979-1 C.B. 92 (compensation is not unreasonable merely
because a corporation pays an insubstantial portion of its
earnings as dividends). Whether to pay a dividend, and the
amount thereof, were business decisions made by petitioner's
board taking into account that petitioner had accumulated
sufficient earnings during profitable years and that petitioner
might need to retain some (or all) of those earnings in order to
weather less profitable periods that were likely ahead. We
refuse to second-guess the board's business judgment under the
facts of this case; we view its decisions concerning the payment
Page: Previous 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 NextLast modified: May 25, 2011