- 24 -
percent and no return, respectively. Although a rate of return
on equity of 21 percent could satisfy an independent investor,
no return would not. In addition, Jones stated that, as an
investor, he would be satisfied with a 10-percent profit margin,
measured as a ratio of net income before taxes over gross
receipts. During the years in issue, petitioner's profit margin
was 6.8 percent and .7 percent, respectively. We find
respondent's contention of an inadequate return to be probative
here.
Respondent points out that petitioner paid Kleindienst
nearly all of its net income before deducting officer
compensation and taxes. Respondent asks us to focus on the time
of year that petitioner declared and paid Kleindienst's bonuses.
Payment of bonuses at the end of the year when the corporation
knows its revenue for the year may enable it to disguise
dividends as compensation. Owensby & Kritikos, Inc. v.
Commissioner, supra at 1329; Estate of Wallace v. Commissioner,
95 T.C. at 556. Here, however, petitioner paid Kleindienst the
bonuses throughout the year and only declared the amount at the
end of the year. Thus, the timing of the bonuses does not
indicate unreasonableness. On the other hand, the fact that
petitioner paid nearly all of its pretax earnings as
compensation to Kleindienst is detrimental to petitioner here.
Estate of Wallace v. Commissioner, supra at 556.
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