H & A International Jewelry, Ltd. - Page 15

                                        -   -15                                           
          $115,726, and has fixed assets under $75,000.  However, we also             
          note the specialized skills required for making money in the                
          jewelry industry and recognize that petitioner increased its                
          sales while opening new offices in Oklahoma City, Oklahoma, in              
          1991 and Augusta, Georgia, in 1992.                                         
               Comparison of Salaries Paid to Gross and Net Income                    
               Courts have compared sales, net income, and capital value to           
          amounts of compensation in deciding whether compensation is                 
          reasonable.  Owensby & Kritikos, Inc. v. Commissioner, supra at             
          1325-1326; Home Interiors & Gifts, Inc. v. Commissioner, supra              
          1155-1156.                                                                  
               For 1991 and 1992, Mr. Haviv's compensation was 9.3 percent            
          and 8.6 percent of gross revenue, respectively.  However, Mr.               
          Haviv's compensation was 88 percent and 128 percent of net income           
          before deductions for his compensation.  While considering                  
          compensation as a percentage of both gross revenue and net income           
          is often helpful, the latter may be more probative because "it              
          more accurately gauges whether a corporation is disguising the              
          distribution of dividends as compensation."  Owensby & Kritikos,            
          Inc. v. Commissioner, supra at 1325-1326.7                                  




          7         While compensation as a percentage of net income is               
          often of minimal significance if viewed alone, it can be an                 
          appropriate factor pointing toward a conclusion that compensation           
          paid is unreasonable.  Owensby & Kritikos, Inc. v. Commissioner,            
          819 F.2d 1315, 1326 n.34 (5th Cir. 1987), affg. T.C. Memo. 1985-            
          267.                                                                        



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