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current 1996 fiscal year in issue. This higher cumulative
average annual return is skewed by the much higher annual returns
on equity petitioner enjoyed during its early years of operation,
when its equity was much lower. See, e.g. Labelgraphics, Inc. v.
Commissioner, 221 F.3d at 1099 (88.5-percent return on $43,482
equity enjoyed during the taxpayer’s first year of operation is
not particularly meaningful to a present investor judging return
on the current year’s equity in excess of $1 million). In
addition, the higher cumulative average return on equity is even
less significant where, as discussed previously, petitioner’s
past undercompensation of Mr. and Mrs. Myers, during prior years
of operation, to the extent not fully recovered prior to the 1996
fiscal year in issue, was intended to be remedied by the deferred
compensation agreements adopted during that year. See also,
e.g., Wagner Constr., Inc. v. Commissioner, T.C. Memo. 2001-160.
At any rate, petitioner has failed to show that an
independent-investor-return-on-equity analysis establishes that
the compensation in issue paid to Mr. and Mrs. Myers for its year
ended July 31, 1996, was reasonable.27 For that year, even before
27Petitioner further failed to address respondent’s argument
that the $77,237 advance Mr. and Mrs. Myers made to it in 1987
should also be included in shareholder invested capital for
purposes of calculating petitioner’s annual return on equity.
Although petitioner did repay or distribute an amount equal to
the $77,237 advance to Mr. and Mrs. Myers during its first 4
years of operation, petitioner provided neither a factual record
nor legal argument that would enable the Court properly to
determine whether the advance represented debt or equity, or
(continued...)
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