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in part to the officer/shareholder for services he performed in
prior years. In that case, we found that the compensation was
reasonable, notwithstanding the fact that it was 73.23 percent of
net taxable income (before deduction of compensation at issue).
However, as noted in Owensby & Kritikos, Inc. v. Commissioner,
supra at 1326 n.34:
the absolute probative value of compensation as a
percentage of net income as an isolated factor is often
minimal. The main reason for this is that this factor
is dependent upon a variable--the company's income--
that, at least in the short run, may be unrelated to
the value of an individual's services. For example, a
company with a high income might pay unreasonable
salaries to its shareholder-employees; yet that
compensation as a percentage of net income would be low
because of the company's high income. On the other
hand, a company with low net income might pay virtually
all of that income to its shareholder-employees in
salaries that are unquestionably reasonable.
In Acme Constr. Co. the net taxable income was $603,771; in
the case at bar the net taxable income is $6,871,433 (before
deduction of the compensation at issue). The difference in
magnitude of the respective companies' net incomes makes the
comparison of the relevant percentages of limited probative
value.
We find that in this case the large portion of net income
paid in compensation to Rogers is a factor that points to the
conclusion that the compensation paid was in part unreasonable.
5. General Economic Conditions
This factor helps to determine whether the success of a
business is attributable to general economic conditions as
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