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corporation does not pay dividends. Owensby & Kritikos, Inc. v.
Commissioner, 819 F.2d 1315, 1326-1327 (5th Cir. 1987), affg.
T.C. Memo. 1985-267. This is especially true in this case where
petitioner's financing arrangements prohibited the payment of
dividends. Furthermore, from 1979 through August 1, 1990, Wood
owned a large block of petitioner's stock and also owned and
operated a competitor. This may have had some impact on
petitioner's dividend policy.
Courts also evaluate the compensation payments from the
perspective of a hypothetical independent investor. The prime
indicator is the return on investors' equity. Id. at 1326-1327.
If the company's earnings on equity after payment of the
compensation remain at a level that would satisfy an independent
investor, there is a strong indication that management is
providing compensable services and that profits are not being
siphoned out of the company disguised as salary. Elliotts, Inc.
v. Commissioner, supra at 1247. Respondent's expert calculated
returns on equity of 27.2 percent, 20 percent, and 21.2 percent
for the fiscal years ending 1990, 1991, and 1992, respectively.
We conclude that an independent investor would have been
satisfied with petitioner's earnings on equity during the years
in issue.
Courts also consider when bonuses were paid. Payment of
bonuses at the end of the fiscal year when a corporation knows
its revenue for the year may enable it to disguise dividends as
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