- 27 -
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.
Page: Previous 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 NextLast modified: May 25, 2011