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compensation in question. See Owensby & Kritikos, Inc. v.
Commissioner, supra at 1326-1327; Medina v. Commissioner, T.C.
Memo. 1983-253.
Whether to pay a dividend, and the amount thereof, were
business decisions Herold made acting as petitioner's sole
director. Herold treated his company, in effect, as a "growth
stock", reinvesting earnings and aiming to derive a return on his
investment in the form of capital gain at some future time by
selling his shares in the company. At the time of trial, a
potential buyer had offered $25 million for Herold's stake in
petitioner.
We refuse to second-guess the business judgment of
petitioner's director under the facts herein; we view its
decision not to pay dividends as a reasonable business decision.2
See Comtec Sys., Inc. v. Commissioner, T.C. Memo. 1995-4. In
addition to the fact that the increase in petitioner's retained
earnings most likely increased the value of its stock, we believe
that a hypothetical investor would have considered over $450,000
growth in retained earnings to have been an acceptable
performance for the period from 1985 to 1993. A growth-oriented
investor might be most concerned with the increases in annual
2 As noted above, petitioner's strategy is to maintain
substantial cash balances to take advantage of early payment
discounts and to present a reassuring image of financial
stability for the large customers with whom petitioner seeks to
do business. By building retained earnings to more than a half
million dollars, petitioner reduces the interest costs it would
otherwise incur to maintain these cash balances.
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