- -25
Petitioner asserted that an arm's-length rate for purchasing
commissions was 3 percent. That is, were it not for Mr. Haviv's
services, it would have had to pay an outsider 3 percent of all
stones purchased. During the deposition, Mr. W, petitioner's
"nearest competitor", made no mention of paying a 3-percent
commission on his purchases. Regardless of what the "outside
rate" might have been, Mr. Haviv was an employee of petitioner,
and petitioner made the business decision to employ a chief
executive officer who could also perform the purchasing function.
We are not persuaded that Mr. Haviv's reasonable compensation may
properly be determined based upon what it would cost to employ a
full-time chief executive officer, a full-time chief operating
officer, a full-time purchaser, and a full-time salesman.
Moreover, because Mr. and Mrs. Haviv were the sole
shareholders, Mr. Haviv's compensation was not bargained for at
arm's length. We therefore must inquire whether an independent
investor would have approved of the compensation levels paid to
Mr. Haviv during the subject years. See Owensby & Kritikos, Inc.
v. Commissioner, supra at 1326-1327.
As the taxpayer's experts testified, a corporation may
choose to retain its earnings to fuel future growth. An investor
may obtain a return on his investment through either dividends or
appreciation in the value of his stock. Id. at 1326. Thus, the
Court looks not only at a corporation's dividend practices, but
Page: Previous 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NextLast modified: May 25, 2011