O.S.C. & Associates, Inc. d.b.a. Olympic Screen Crafts - Page 8

                                        - 8 -                                         
          approximately 81 percent, 94 percent, and 92 percent,                       
          respectively, of petitioner's net income (i.e., calculated by               
          adding back compensation).  Such high percentages are consistent            
          with the existence of disguised dividends.  See Pacific Grains,             
          Inc. v. Commissioner, 399 F.2d 603 (9th Cir. 1968), affg. T.C.              
          Memo. 1967-7.                                                               
               Second, petitioner has never declared or paid a dividend.              
          While the U.S. Court of Appeals for the Ninth Circuit has                   
          indicated that this fact is not dispositive, Elliotts, Inc. v.              
          Commissioner, supra at 1246, it is a relevant consideration,                
          Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d 1315, 1324               
          (5th Cir. 1987), affg. T.C. Memo. 1985-267; Nor-Cal Adjusters v.            
          Commissioner, 503 F.2d 359, 362 (9th Cir. 1974), affg. T.C. Memo.           
          1971-200.  Mr. Rosi testified that in 1988 or 1989 he advised               
          petitioner to pay dividends and that Messrs. Blazick and                    
          Richter's response discouraged him from offering such advice                
          during the years in issue.  Mr. Blazick, however, when asked why            
          petitioner did not pay dividends, testified that dividends were             
          not paid "Because Mr. Rosi prepared a procedure for us to follow            
          and we did."                                                                
               Third, Mr. Rosi's implementation of the plan had the effect            
          of arbitrarily increasing allocations above the amounts the plan            
          authorized.  This occurred in 1990 and 1991 when Mr. Rosi                   
          utilized industry average gross profit margins lower than those             
          published in the Survey, and in 1992 when Mr. Rosi reduced the              

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