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compounded annual rate of return they calculate was enjoyed
through the year ended July 31, 1996, on that investor’s initial
$10,000 investment in the corporation. Mr. Gelfond computed this
43.82 percent compounded annual rate by using a present-value-
future-value formula where: Present value equals $10,000 (the
shareholder initial investment); future value equals $378,542
(the company’s stated “equity” or net book asset value at the end
of the 1996 fiscal year before consideration of its deferred
payment obligation to Mr. Myers and Mrs. Myers); and N (the
number of years over which that investment is annually
compounded) equals 10.
Under the independent investor test, a company’s annual
return on equity usually examines that company’s net income after
taxes for that year. More importantly, the shareholders’ equity
in the company, upon which an annual return is calculated,
includes not just the shareholders’ initial invested capital but
the company’s prior accumulated earnings. Dexsil Corp. v.
Commissioner, 147 F.3d at 99; Labelgraphics, Inc. v.
Commissioner, T.C. Memo. 1998-343; see also Exacto Spring Corp.
v. Commissioner, supra at 837 (noting, among other things, that
“What investors care about is the corporate income available to
pay dividends or be reinvested”), revg. T.C. Memo. 1998-220;
Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d 1315, 1326-
1327 (5th Cir. 1987) (noting that the prime indicator of the
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