- 21 -
of their stock caused, for example, by the retention of earnings.
Owensby & Kritikos, Inc. v. Commissioner, supra; Home Interiors &
Gifts, Inc. v. Commissioner, 73 T.C. at 1162.
Petitioner paid $48,000 in dividends in fiscal years 1990
and 1991 and $24,000 in dividends in fiscal year 1992. Whether
to pay a dividend, and the amount thereof, were business
decisions made by petitioner's board of directors. As explained
in the August 31, 1986, minutes of petitioner's board of
directors meeting, the decision whether to pay dividends was
based on petitioner's need to: (1) Make up past
undercompensation of its officers, (2) assure current growth, (3)
assure future growth, (4) allow for expansion into a new 150,000-
square foot distribution center, and (5) prepare for anticipated
overseas expansion. We decline to second-guess the board of
director's business judgment under the facts of this case; we
view its decisions concerning the payment of dividends and the
amounts thereof as reasonable business decisions.
In reviewing the reasonableness of an employee's
compensation, courts often look at whether a hypothetical
shareholder would have received a fair return on his investment
after the payment of the compensation in question. Owensby &
Kritikos, Inc. v. Commissioner, supra at 1326-1327.
A hypothetical investor in petitioner would have realized
the following returns on equity for the years in issue: 81.77
Page: Previous 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 NextLast modified: May 25, 2011