Herold Marketing Associates, Inc. - Page 21




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          continuing viability threatened, and, again, Herold devised a new            
          strategy:  a three-pronged, targeted focus on key products in                
          each of three different phases of market penetration.  Combined              
          with the consultative selling technique Herold had crafted and               
          his focus on selling to very large customers who would not                   
          normally do business with a company the size of petitioner,                  
          Herold succeeded in reinventing and revitalizing petitioner's                
          business each time it was threatened.                                        
          6.  Comparison of Salaries With Distributions to Officers and                
          Retained Earnings                                                            
               The failure to pay more than minimal dividends may suggest              
          that reported compensation actually is (in whole or in part) a               
          dividend.  Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d                
          1315, 1322-1323 (5th Cir. 1987), affg. T.C. Memo. 1985-267;                  
          Charles Schneider & Co. v. Commissioner, 500 F.2d at 151.                    
          Corporations, however, are not required to pay dividends.                    
          Shareholders may be equally content with the appreciation of                 
          their stock caused, for example, by the retention of earnings.               
          Owensby & Kritikos, Inc. v. Commissioner, supra; Home Interiors &            
          Gifts, Inc. v. Commissioner, 73 T.C. at 1162; see also Rev. Rul.             
          79-8, 1979-1 C.B. 92 (compensation is not unreasonable merely                
          because a corporation pays an insubstantial portion of its                   
          earnings as dividends).  In reviewing the reasonableness of an               
          employee's compensation, a hypothetical independent investor                 
          standard may be used to determine whether a shareholder has                  
          received a fair return on investment after the payment of the                


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