Eberl's Claim Service, Inc. - Page 25




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               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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