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return a corporation is earning for its investor is its return on
equity).
In Eberl’s Claim Serv., Inc. v. Commissioner, T.C. Memo.
1999-211, we rejected the taxpayer’s argument that the
corporation’s “return on equity” should be based on its founding
shareholder’s small initial investment of $500, and noted that
the taxpayer had cited no case in which a court gave significant
weight to a high return based on a founding shareholder’s small
initial investment. We explained that the courts have instead
relied on other financial factors when a shareholder’s capital
investment is small, citing Alpha Med., Inc. v. Commissioner, 172
F.3d 942 (6th Cir. 1999) (Court derived return on equity by
taking increase in equity for the year at issue plus the
dividends paid that year, divided by shareholder’s $1,000 capital
investment plus retained earnings at the beginning of that year)
revg. T.C. Memo. 1997-464 n.8; Labelgraphics, Inc. v.
Commissioner, T.C. Memo. 1998-343 (cumulative average return on
equity may be skewed by high annual returns for earlier years in
which equity was low); H&A Intl. Jewelry, Ltd. v. Commissioner,
T.C. Memo. 1997-467.
In contrast to petitioner, respondent, among other things,
calculated petitioner’s return on equity as equaling petitioner’s
net income for a year, divided by petitioner’s equity at the
beginning of that year. We note that in various reasonable
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