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consideration of its future deferred payment obligation to Mr.
and Mrs. Myers, petitioner had a $61,904 net loss after taxes,
suffered a negative return on equity (ranging from a negative
11.58-percent return to a negative 16.35-percent return under the
three approaches used supra to calculate its annual return on
equity), and experienced a $155,901 reduction in its equity or
net asset value (i.e., its $534,443 of equity at the beginning of
the 1996 fiscal year, less its $378,542 yearend equity).28 We do
27(...continued)
should be considered part of petitioner’s invested capital for
the purpose of determining the overall compounded rate of return
that would be deemed to have accrued to an independent investor
as of the end of the fiscal year for which we must analyze
petitioner’s financial performance. Obviously, the addition of
the $77,237 to petitioner’s equity or invested capital would
reduce the compounded rate of return regarded as having accrued
as of the end of the fiscal year in issue to an independent
investor who had purchased all of petitioner’s capital stock at
its inception. It can also be argued that the debt-equity
distinction should have no bearing on assessing the overall
return that accrued on the total amount of funds--$87,237--made
available to petitioner by its officer-shareholders. See Pratt,
“The Debt-Equity Distinction in a Second-Best World”, 53 Vand. L.
Rev. 1056 (2000).
28Petitioner notes that, although it reported a $61,904 net
loss after taxes for its 1996 fiscal year, $183,000 of the
bonuses paid to Mr. and Mrs. Myers that year were belated bonuses
to them for its 1995 fiscal year. Petitioner argues that this
$183,000, in effect, should be reallocated and treated as a
fiscal year 1995 business expense for purposes of determining its
annual returns on equity for its 1995 and 1996 fiscal years,
since the $183,000 was reasonable compensation for services Mr.
and Mrs. Myers rendered during the 1995 fiscal year. In the
notice of deficiency, respondent allowed petitioner a deduction
under sec. 162 for the $238,800 in total bonuses it paid to Mr.
and Mrs. Myers during the 1996 fiscal year. We conclude that
petitioner’s reallocation argument does not help its case. If
(continued...)
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