- 21 -
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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