-20-
Appeals for the Sixth Circuit held that the compensation was
reasonable. However, unlike petitioner, the taxpayer in Alpha
Med., Inc. was financially successful; its taxable income
increased by a factor of 18, and its net worth increased by a
factor of 35 in 4 years. In contrast, petitioner had negative
taxable income in all years except fiscal year 1993, negative
accumulated retained earnings in all years except fiscal year
1993, and low profits in fiscal years 1992 and 1993.
This factor favors respondent.
6. Comparison of Salaries Paid With Gross and Net Income
A comparison of compensation to net income can indicate
whether a corporation is disguising dividends as compensation.
Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d at 1325-1326;
Mayson Manufacturing Co. v. Commissioner, supra.
Eberl's compensation was 99.5 percent of petitioner's net
income1 for fiscal year 1992, and 98 percent of its net income
for fiscal year 1993. Petitioner's pattern of distributing the
vast majority of its net income as compensation to Eberl at the
end of each year suggests that the amount of compensation paid
was unreasonable. Owensby & Kritikos, Inc. v. Commissioner,
supra at 1326.
Petitioner contends that Eberl's compensation was reasonable
because it had agreed to pay Eberl 20 percent of its gross
1 Net income is income before tax, net operating loss, and
compensation.
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