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and printing industry.
D. Conflict of Interest
This fourth factor examines whether a relationship exists
between the company and employee that might permit the company to
disguise nondeductible corporate distributions as section
162(a)(1) deductible compensation. Thus, close scrutiny must be
given where the paying corporation is controlled by the
compensated employee, as in the instant case. Elliotts, Inc. v.
Commissioner, supra at 1246-1247. However, "The mere existence
of such a relationship, * * * when coupled with an absence of
dividend payments, does not necessarily lead to the conclusion
that the amount of compensation is unreasonably high." Id. at
1246. Instead, the fact finder is further to adopt the
perspective of an independent investor in determining whether the
investor would be satisfied with the company's return on equity
after the compensation in issue was paid. Id. at 1247.
As a result of its payment of the $722,913 bonus to Mr.
Martin, petitioner had a $98,639 loss and a negative 6.19 percent
return on equity for the 1990 fiscal year. We do not think an
independent investor would be happy with such a negative return
on equity, especially where the "unusually high" bonus payment
producing the loss for the fiscal year is equal to approximately
45.37 percent of the investor's equity in the company ($722,913
divided by $1,593,340 net assets).
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