Wagner Construction, Inc. - Page 35




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          used a hypothetical investment in capital for purposes of                   
          computing a fair return on the capital.  Use of the hypothetical            
          investment in capital resulted in a smaller fair return for most            
          years.  The smaller fair return resulted in a larger excess,                
          which Mr. Reilly accumulated and used as the amount of                      
          undercompensation.  Mr. Reilly used the more realistic                      
          stockholders equity shown on petitioner's Forms 1120, however, to           
          compute compensation using the Watson Wyatt formula.  We reject             
          this inconsistency.                                                         
               As an additional analysis, Mr. Reilly calculated the average           
          compound annual returns to petitioner's stockholders.  He used              
          $315,766 (approximately twice the price petitioner paid for                 
          Clifford's 1,000 shares of stock) as the value of the                       
          stockholders' initial investment on October 31, 1986, and three             
          different measures of petitioner's stockholders equity.  Using              
          his fair return of invested capital analysis and the estimated              
          value of $1,834,375 as of October 31, 1996, Mr. Reilly calculated           
          that the average annual after-tax return over the 10-year period            
          from 1986 to 1996 was 19.24 percent.  Using the $3,133,877 book             
          value of stockholders equity as of October 31, 1996, Mr. Reilly             
          calculated that the average annual after-tax return over the 10-            
          year period was 25.80 percent.  Finally, using the $1,150,000               
          purchase price Dennis paid to Curtis for his 25 percent of                  
          petitioner's stock in November 1997 to determine an estimated               






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