Labelgraphics, Inc. - Page 28

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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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