- 26 -
of dividends and the amounts thereof as reasonable business
decisions.7 Petitioner paid $65,000 in dividends in the year at
issue. Its shareholder’s equity grew from $63,903 on July 31,
1983, to $960,582 on July 31, 1985. Its retained earnings grew
from $62,902 on July 31, 1983, to $959,582 on July 31, 1985.
See Comtec Sys., Inc. v. Commissioner, T.C. Memo. 1995-4. In
addition to the fact that the increase in petitioner's retained
earnings most likely increased the value of its stock, we believe
that a hypothetical investor would have considered $959,582 in
retained earnings to have been a worthy performance for the
3-year period. Moreover, the Officers received dividends from
petitioner's earnings. The dividends per share increased from
$95 per share on July 31, 1984, to $617.50 per share on July 31,
1985. On this record, it is clear that an investment in
petitioner's stock was very attractive and that the Officers
received an adequate share of petitioner's profits through
dividends. This factor favors petitioner.
h. Prevailing Rates of Compensation for Comparable
Positions in Comparable Companies
Both petitioner and respondent rely on expert testimony with
respect to this factor. Expert testimony is appropriate to help
7 Bearing in mind that respondent has not determined that
petitioner is liable for the accumulated earnings tax of sec.
531, it is possible that she would agree that the large increase
in petitioner's retained earnings was necessary for the
reasonable needs of petitioner's business.
Page: Previous 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 NextLast modified: May 25, 2011