Alpha Medical, Inc., f.k.a. Alpha Medical Management, Inc. - Page 27

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          1326-1327; Pulsar Components Intl., Inc. v. Commissioner, T.C.              
          Memo. 1996-129.  Rogers had sole discretion of whether to pay a             
          dividend, and the amount thereof.  Petitioner paid $1,500 in                
          dividends in the year at issue.  Although the amount of this                
          dividend is a 150-percent return on the capital invested, it is             
          insignificant in comparison to petitioner's earnings.                       
               A corporation's dividend policies should not, however, be              
          viewed in a vacuum.  Owensby & Kritikos, Inc. v. Commissioner,              
          supra at 1326-1327.  The Court should look at the total return              
          the corporation is earning for its shareholders, the prime                  
          indicator of which is the return on shareholders' equity.  Id.              
               If, * * * the company's earnings on equity remain at a                 
               level that would satisfy an independent investor, there                
               is a strong indication that management is providing                    
               compensable services and that profits are not being                    
               siphoned out of the company disguised as salary.                       
               [Elliotts, Inc. v. Commissioner, 716 F.2d 1241, 1247                   
               (9th Cir. 1983), revg. T.C. Memo. 1980-282; fn. ref.                   
               omitted.]                                                              
               Petitioner's shareholder's equity grew from $97,623 at                 
          yearend 1986 to $1,708,137 at yearend 1989 to $3,389,705 at                 
          yearend 1990.7  Petitioner's total return on equity for the year            
          at issue was 98.65 percent.8  This return is impressive, and an             


               7  In this case, shareholder's equity is the sum of Rogers'            
          original capital investment, $1,000, plus retained earnings.                
               8  Return on equity is calculated after deducting all                  
          amounts paid as compensation.  Thus, total return on equity is              
          the sum of the increase in shareholder's equity from yearend 1989           
          to yearend 1990 plus dividends paid in 1990, divided by                     
          shareholder's equity at yearend 1989.                                       



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