- 26 -
4. Character and Condition of the Company: Including
Sales, Net Income, Capital Value, and General Economic
Fitness of the Company
From the perspective of an independent investor, the
character and condition of the company, including its sales, net
income, capital value, and general economic fitness are important
in deciding how much compensation to pay to a corporation’s top
officers. See Rapco, Inc. v. Commissioner, supra. Petitioner
contends that the fact that its sales increased from $2,723,342
in 1983 to $3,549,669 in 1993, $3,687,715 in 1994, and $4,057,464
in 1995 shows that its financial condition was good.
We disagree. Petitioner’s retained earnings were lower each
year from 1991 to 1995 than they were for any year from 1983 to
1990. Petitioner’s sales did not increase from 1983 to 1995 in
real dollars. Petitioner’s net income before taxes declined from
$279,705 in 1983 to $67,877 in 1993, $60,220 in 1994, and $89,315
in 1995. Petitioner’s income declined from 1990 to 1994.
Petitioner’s sales and income increased from 1994 to 1995, but
were still well below the 1983 to 1990 amounts.
We believe petitioner’s financial condition in the years in
issue would give an independent investor doubts about the
performance of petitioner’s top management. See B.B. Rider Corp.
v. Commissioner, 725 F.2d 945, 953 (3d Cir. 1984) (taxpayer’s
deduction for large increases in an employee’s salary disallowed
Page: Previous 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 NextLast modified: May 25, 2011