-23-
7. Comparison of Salary to Distributions to Shareholders
and Retained Earnings
If salaries paid to controlling shareholders are large
compared to salaries paid to nonowner managers who have similar
responsibilities, the salaries suggest that the amount of
compensation is a function of ownership. Elliotts, Inc. v.
Commissioner, 716 F.2d at 1247.
The failure to pay more than a minimal amount of dividends
may suggest that some of the amounts paid as compensation to the
shareholder-employee is a dividend. Edwin's, Inc. v. United
States, 501 F.2d 675, 677 n.5 (7th Cir. 1974); Charles Schneider
& Co. v. Commissioner, 500 F.2d 148, 152-153 (8th Cir. 1974),
affg. T.C. Memo. 1973-130; Owensby & Kritikos, Inc. v.
Commissioner, supra at 1322-1323. However, corporations are not
required to pay dividends; shareholders may be equally content
with the appreciation of their stock if the company retains
earnings. Owensby & Kritikos, Inc. v. Commissioner, supra at
1326-1327; Elliotts, Inc. v. Commissioner, supra; Home Interiors
& Gifts, Inc. v. Commissioner, 73 T.C. at 1161.
Petitioner has never paid dividends. Nonpayment of
dividends in conjunction with paying contingent compensation to
controlling shareholders, such as Eberl, suggests that
unreasonable and excessive compensation is being paid.
Pepsi-Cola Bottling Co. of Salina, Inc. v. Commissioner, 528 F.2d
Page: Previous 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 NextLast modified: May 25, 2011