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Respondent, based on petitioner’s tax returns, contends
that, after subtracting the compensation deducted by petitioner,
the return on petitioner’s equity is as follows:
Pretax After-tax Return on
Year income income Equity1 equity(%)
19952 $17,825 $15,151 $2,013,692 .75
1996 58,755 49,066 2,028,715 2.42
1 The amount of equity reflected consists of the total of
the yearend balances in the capital stock, paid-in surplus, and
retained earning accounts.
2 The $17,825 amount is after a deduction for a net
operating loss carryforward from another year. Without
considering the net operating loss deduction, the return on
equity would be 1.67 percent for 1995.
Petitioner does not dispute the returns on equity computed by
respondent based upon the information reported in petitioner’s
income tax returns. Petitioner contends that we should focus on
the return on equity in the form of appreciation of petitioner’s
assets. Based on petitioner’s calculation of the increases
(appreciation) in the value of realty and securities, its return
on equity for 1995 and 1996 would have been 34.5 percent and 36.5
percent, respectively. Petitioner, on the same basis, contends
that it had a 29-percent average return on equity for the years
1993 through 1996.
Respondent argues that petitioner’s approach to measuring
the return on equity is speculative and overstated and does not
match the amount shown on petitioner’s tax returns. In other
words, respondent contends that the return on equity should be
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