Wy'East Color, Inc. An Oregon Corporation - Page 21

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          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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