William J. and Sandra D. Heitz - Page 21

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          677.  Respondent argues that several characteristics of Exacto              
          support the conclusion that the level of compensation paid to Mr.           
          Heitz was unreasonable.  First, respondent argues that Exacto's             
          low level of dividends is an indication that part of Mr. Heitz’             
          compensation was really disguised dividends.  Exacto did not pay            
          dividends from FY 1989 through FY 1994.                                     
               A corporation's failure to pay dividends may be a factor in            
          determining the reasonableness of officer compensation.  Owensby            
          & Kritikos, Inc. v. Commissioner, 819 F.2d at 1324.                         
          Corporations, however, are not required to pay dividends.                   
          Indeed, shareholders may be equally content with the appreciation           
          of their stock caused, for example, by the retention of earnings.           
          Id. at 1323-1324; Home Interiors & Gifts, Inc. v. Commissioner,             
          73 T.C. at 1162.  Shareholder equity increased from $9,000 (Mr.             
          Heitz’, Mr. Greene's, and Mr. Quillen's initial capital                     
          investment in 1960) to $7,550,000 in 1989.  The appreciation in             
          the value of Exacto's stock weakens respondent's argument that              
          the earnings of Exacto were being siphoned out in the form of               
          disguised dividends.                                                        
               Second, respondent correctly contends that Mr. Heitz was               
          able to influence the amount of his own compensation as he was              
          the majority shareholder and president of Exacto.  In such a                
          situation, we must carefully scrutinize the reasonableness of the           







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