- 23 -
v. Commissioner, supra at 1247. The Court of Appeals for the
Ninth Circuit, in Elliotts, Inc., calculated the return on equity
using the yearend shareholder's equity. We follow that approach.
See Golsen v. Commissioner, 54 T.C. 742 (1970), affd. on another
issue 445 F.2d 985 (10th Cir. 1971). Dividing petitioner's net
profit (after payment of compensation and a provision for income
taxes) by the yearend shareholders' equity, as reflected in its
financial statements, yields the following:
FYE Percentage Return
June 30 on Equity
1985 94
1986 20
1987 40
1988 30
1989 42
1990 1
1991 (13)
1992 2
Under the circumstances of this case, we find that the
return on equity for the years at issue (1990-92) is not a
reliable indicator of the reasonableness of Ginger's
compensation. See Elliotts, Inc. v. Commissioner, supra at 1247
n.5. We doubt that the 1-percent return on equity for the year
ended June 30, 1990, would satisfy an independent investor;
however, there is probative evidence that Ginger had forgone
compensation in prior years in an attempt to enlarge petitioner's
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