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for Kleindienst, received a commission of 10 percent of the
escrow fee generated (closing commission) in addition to a base
salary. Petitioner reassigned some of the escrows that
Kleindienst solicited. The officer handling the reassigned
escrow received the 10-percent closing commission. Escrow
officers, not including Kleindienst, closed escrows generating
gross receipts of $877,795 and $778,144 during the years in
issue, respectively. Kleindienst closed escrows generating gross
receipts of $588,523 and $684,099, respectively.
During its first year in business, taxable year ended July
31, 1985, petitioner employed three people and generated gross
receipts of $318,963. By 1989 and 1990, petitioner's gross
receipts had increased to $1,466,318 and $1,462,243,
respectively, and petitioner employed 22 and 24 people,
respectively, including Kleindienst, the other escrow officers,
and support staff. In part, petitioner's success resulted from a
favorable economy during the late 1980's. Economic conditions
may have a profound effect on the performance of the escrow
industry. From the 1984 beginning of petitioner's escrow
business, there were six escrow firms in the Palm Springs area.
Despite the substantial increase in gross receipts, net
income before taxes was $100,212 and $10,867, for 1989 and 1990,
respectively. During the years in issue, petitioner's profit
margin, measured as ratio of net income before taxes over gross
receipts, was 6.8 percent and .7 percent, respectively.
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