- 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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