- -26
also at the total return the corporation is earning for its
investors. Id. A prime indicator of the return a corporation is
earning for its investors is its return on equity.13 See also
id. at 1327. Petitioner's return on equity for the years 1988 to
1992 was as follows:
Return on Equity 1988-1992
Taxable Year
Ended 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92
Shareholder
Equity
Beg. of Yr. $113,753 $136,289 $165,333 $172,363 $235,066
net income 40,317 29,045 26,521 62,703 -119,340
Return on
Equity 35% 21% 16% 36% -51%
An independent investor would not be satisfied with the awarding
of a yearend bonus worth over seven times an employee's salary, a
return on equity of negative 51 percent.
Another benchmark for reasonableness is the value of an
employee to his company. We find it hard to believe that Mr.
Haviv could be worth, in 1 year, more than petitioner has
cumulatively earned under Mr. Haviv's 8 years of stewardship.
Based upon all of the facts, it is reasonable to conclude
that Mr. Haviv's compensation was neither bargained for nor
reached at arm's length. Together with other facts and
circumstances, this is a strong indication that the bonuses paid
to Mr. Haviv were a disguised dividend. See id. at 1326 n.34.
13 Return on equity is calculated after deducting all
amounts paid as compensation.
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