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Petitioner retained its earnings and did not pay dividends
before 1992, when it paid dividends of $10,000. Petitioner
needed to retain earnings to be able to obtain surety bonds which
allowed it to bid on large contracts. Petitioner's retained
earnings grew from negative $271,603 in 1990 to $585,554 under
the completed contract method of accounting and from $147,885 to
$786,282 under the percentage of completion method at the end of
the year in issue. We believe a shareholder of petitioner's
would be satisfied with these results.
Respondent points out that Choate wanted petitioner to elect
S corporation status earlier than July 1, 1993, and that he
thought that this case would have been unnecessary if petitioner
had made the election earlier. Respondent contends that this
shows that Choate's bonus was a disguised dividend. Respondent
cites no case in which a court considered the fact that a
business owner preferred S corporation status in deciding if
compensation was reasonable. We disagree that Choate's wanting
to elect S corporation status has any bearing here.
This factor favors petitioner.
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