- 20 -
C. Character and Condition of the Company
The third category of factors provided by Elliotts, Inc. v.
Commissioner, 716 F.2d 1241 (9th Cir. 1983), concerns the
character and condition of the company. Important
considerations are the size of the company, as indicated by
gross sales, net income, or capital value, general economic
conditions, and the complexities of the business. Elliotts,
Inc. v. Commissioner, supra at 1246. The success of the
business provides a basis for increases in compensation. Summit
Publishing Co. v. Commissioner, T.C. Memo. 1990-288.
Petitioner's gross receipts grew from $318,963 in 1984, its
first year in operation, to over $1.46 million in 1989 and 1990.
Petitioner's shareholder equity increased from an initial
investment of $20,000 to $341,708 in taxable year 1989. The
growth in gross receipts and shareholder equity provides clear
evidence that Kleindienst was dynamic and effective. However,
we find it somewhat telling that petitioner's net income after
taxes remained low. For the years in issue, net income after
taxes was $72,000 and $0, respectively, while it was $40,169
after 1 year in business and reached a peak of $93,546 in
taxable year ended July 31, 1988.
In addition, Kleindienst is not the sole reason for
petitioner's substantial increase in gross receipts. Favorable
economic conditions during the years in issue also played a role
Page: Previous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 NextLast modified: May 25, 2011