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bonus for his efforts in successfully developing the Micro Clean
100 process.
This $406,000 of reasonable compensation, we estimate,
results in a revised return on equity for petitioner of
approximately 10.20 percent for the 1990 fiscal year.7 We think
an independent investor would be satisfied with this return on
equity and with petitioner's 1990 fiscal year financial
performance. Despite the slight decline in business experienced
for that year, Mr. Martin still had done an excellent job in
managing petitioner. As previously discussed, petitioner was
encountering increased competition in the Portland market and was
experiencing some loss of sales due to its customers' relocating
their manufacturing facilities overseas. Moreover, petitioner
7Petitioner's organizational minutes provide that if the
Internal Revenue Service or a court of competent jurisdiction
determines any "salary to any stockholder officer" to be a
dividend, the payment shall immediately be treated as a loan to
the officer (with interest payable at the legal rate from the
date of payment thereof), due and payable within 1 year from the
date of determination. If Mr. Martin's total compensation was
$406,000, rather than $878,913, petitioner's 1990 fiscal year
income would be increased $472,913, giving it a revised net
income before taxes of $320,274 (the ($152,639) net loss
reflected on the 1990 fiscal year financial statement, plus
$472,913). Assuming combined Federal and State income taxes are
imposed equal to 40 percent of this revised net income before
taxes, petitioner's revised net taxable income after taxes would
be $192,164 ($320,274 multiplied by 60 percent) and its revised
equity would be $1,884,143 (revised retained earnings, plus
invested capital, less treasury stock, per 1990 fiscal year
financial statement). This would represent a revised return on
equity of approximately 10.20 percent ($192,164 divided by
$1,884,143).
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