- 21 -
Mr. and Mrs. Cummings did not explain this apparent
inconsistency.
This factor favors petitioner somewhat.
b. Character and Condition of the Company
A company's size as indicated by its sales, net income, or
capital value, the complexities of the business, and general
economic conditions is relevant in deciding whether management
fees are reasonable. Elliotts, Inc. v. Commissioner, 716 F.2d
at 1246; see E. Wagner & Son, Inc. v. Commissioner, 93 F.2d 816,
819 (9th Cir. 1937); General Water Heater Corp. v. Commissioner,
42 F.2d 419, 420 (9th Cir. 1930), affg. 14 B.T.A. 4 (1928).
Petitioner's performance improved during the years in issue.
Petitioner's gross sales increased 18.96 percent in fiscal year
1990 and 25.49 percent in fiscal year 1991. Its total assets
increased 23.96 percent in fiscal year 1990 and 6.6 percent in
fiscal year 1991. Its taxable income increased 49.20 percent in
fiscal year 1990 and 46.53 percent in fiscal year 1991. This
factor favors petitioner.
c. The Hypothetical Investor's Viewpoint
It is appropriate to consider whether the amount paid for
management service is reasonable from the perspective of a
hypothetical independent investor. Elliotts, Inc. v.
Commissioner, supra at 1247. To calculate the return on
investment, we divide taxable income before net operating losses
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