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potentially exploitable relationship may exist where, as in this
case, the * * * [employees are] the taxpaying company's sole or
controlling shareholder[s]". Elliotts, Inc. v. Commissioner,
supra at 1246.
The relationship in this case, where Ginger and his wife
were petitioner's sole shareholders, warrants scrutiny. Id. The
mere existence of such a relationship, coupled with an absence of
dividend payments, however, does not necessarily lead to the
conclusion that the amount of compensation is unreasonably high.
Id. They are relevant factors but are not to be viewed in
isolation. Id. at 1247. Furthermore, we shall not presume a
disguised dividend from the bare fact that a profitable
corporation does not pay dividends. Id. at 1244; Owensby &
Kritikos, Inc. v. Commissioner, 819 F.2d 1315, 1326-1327 (5th
Cir. 1987), affg. T.C. Memo. 1985-267.
The Court of Appeals for the Ninth Circuit formulated the
inquiry in such a situation by evaluating the compensation
payments from the perspective of a hypothetical independent
investor. The prime indicator is the return on its investors'
equity. Owensby & Kritikos, Inc. v. Commisisoner, supra at 1326-
1327. If the company's earnings on equity after payment of the
compensation remain at a level that would satisfy an independent
investor, there is a strong indication that management is
providing compensable services and that profits are not being
siphoned out of the company disguised as salary. Elliotts, Inc.
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