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Petitioner's witness, Larri E. Jones (Jones), an executive vice
president of a title insurance company with an escrow practice,
would be satisfied with a 10-percent profit margin.
Petitioner did not pay dividends from 1984 through 1988, and
in 1989 and 1990, it paid $3,000 and $3,250 in dividends,
respectively. Petitioner did not pay dividends before 1989 to
build up retained earnings. Petitioner allowed retained earnings
to accumulate to guard against possible slowdowns in the escrow
industry and to satisfy government liquidity requirements.
Accumulating retained earnings is a normal practice in the escrow
industry, especially for startup firms. Shareholder equity
increased from $20,000 (Kleindienst's initial capital investment)
to $341,708 by 1989. Shareholder equity decreased in 1990 to
$338,458, and petitioner's net income after taxes was $0.
Kleindienst received compensation in the following amounts:
Year Total Percent of
Ended Compensa- Base Gross Gross Receipts
July 31 tion Salary Bonus Receipts (%)
1984 0 0 0 0 N/A
1985 $109,250 $39,250 $70,000 $318,963 34.25
1986 189,346 53,250 136,096 496,169 38.16
1987 364,755 94,250 270,505 830,557 43.92
1988 390,000 155,000 235,000 1,101,072 35.42
1989 584,710 240,000 344,710 1,466,318 39.88
1990 564,800 300,000 264,800 1,462,243 38.63
In 1989 and 1990, Kleindienst's compensation as a percentage of
taxable income before deducting her compensation was 85 percent
and 98 percent, respectively.
Petitioner did not have a written employment agreement with
Kleindienst or a stated formula for determining her compensation.
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