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compensation cases, three different approaches generally have
been used to compute a company’s return on equity. The company’s
net income that year has been divided by either: (1) Its equity
at the beginning of that year (e.g., Alpha Med., Inc. v.
Commissioner, T.C. Memo. 1997-464 n.8, (2) its ending equity that
year (e.g., Labelgraphics, Inc. v. Commissioner, T.C. Memo. 1998-
343), or (3) the year’s average equity (e.g., Dexsil Corp. v.
Commissioner, 147 F.3d at 99.
Over the period from January 1, 1987, through July 31, 1996,
petitioner’s annual net profit or net loss after taxes, equity
(beginning, yearend, and year’s average), and return on equity
(calculated under each of the three foregoing approaches,
before consideration of petitioner’s “deferred compensation”
obligation to Mr. and Mrs. Myers) are as set forth below:
Net Profit Equity Return on Equity2
FYE (Net Loss) Begin. Yearend Year’s Begin. Yearend Year’s
July 31 After Taxes Equity Equity Avg. Eq.1 Equity Equity Avg.
Eq.
1987 $18,317 $10,000 $31,405 $20,703 183.17% 58.33% 88.48%
1988 60,729 31,405 101,931 66,668 193.37 59.58 91.09
1989 46,655 101,931 134,073 117,502 45.77 34.80 39.54
1990 38,632 134,073 172,011 153,042 28.81 22.46 25.24
1991 53,684 172,011 218,462 195,237 31.21 24.57 27.50
1992 3,274 218,462 221,554 220,008 1.50 1.48 1.49
1993 61,521 221,554 282,989 252,272 27.77 21.74 24.39
1994 193,624 282,989 475,808 379,399 68.42 40.69 51.03
1995 59,292 475,808 534,443 505,126 12.46 11.09 11.74
1996 (61,904) 534,443 378,542 456,493 (11.58) (16.35) (13.56)
1Sum of beginning equity plus yearend equity, divided by 2.
2Net profit or net loss after taxes, divided by equity.
Regardless of which of the three approaches is used to
calculate petitioner’s return on equity, for the 1996 fiscal year
in issue petitioner suffered a negative return on equity even
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