-25-
Petitioner cites no case in which the court gave significant
weight to a high return on equity based on a founding
shareholder's small initial investment. Courts have relied on
other financial factors when a shareholder's capital contribution
is small. See, e.g., Alpha Medical, Inc. v. Commissioner, 172
F.3d 942 (6th Cir. 1999), revg. T.C. Memo. 1997-464 (Court
derived return on equity by comparing retained earnings for the
year at issue plus the shareholder's $1,000 capital investment to
retained earnings for the prior year plus the shareholder's
capital investment); Labelgraphics, Inc. v. Commissioner, supra
(annual return on equity may be skewed in years in which the
taxpayer's equity is low); H&A Intl. Jewelry, Ltd. v.
Commissioner, T.C. Memo. 1997-467. We give petitioner's method
for calculating return on equity3 for fiscal year 1993 based on
Eberl's $500 investment little weight in view of petitioner's
small amount of accumulated retained earnings, taxable income,
profits, and lack of dividends. Finally, petitioner did not
retain earnings in fiscal years 1988 to 1990 and had negative
cumulative retained earnings in fiscal years 1988 to 1992; there
is no evidence that the value of petitioner's stock appreciated
during the years in issue; and petitioner offered no reason for
its failure to pay dividends. See Owensby & Kritikos, Inc. v.
3 The parties disagree as to whether we compute return on
equity using current or accumulated retained earnings.
Resolution of this dispute does not affect the outcome of this
case.
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