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petitioner's actual after-tax rate of return; and (6) the
officers' compensation.
Year-End Fair Fair Actual Actual Officers'
Year Equity Return RateReturn Return Return Rate Compensation
1985 $176,489
1986 255,018 NA NA $78,529 44.5% $195,000
1987 442,796 17.50% $44,628 187,778 73.6 81,282
1988 543,785 19.57 86,655 100,990 22.8 285,912
1989 834,499 21.61 117,512 290,714 53.5 243,090
1990 1,907,331 20.29 169,320 1,072,832 128.6 304,478
1991 2,242,380 20.72 395,199 335,049 17.6 930,100
1992 2,965,064 19.76 443,094 722,684 32.2 788,400
1993 3,042,630 19.67 583,228 77,566 2.6 988,920
1994 2,904,692 17.59 535,199 (137,938) -4.5 1,246,437
1995 2,890,748 18.60 569,320 (13,944) -0.5 1,293,948
1996 3,133,877 17.18 496,631 243,129 8.4 1,099,825
From 1986 to 1992, petitioner's actual after-tax return on
equity greatly exceeded the expected fair return on equity, and
the increase in petitioner's retained earnings increased the
value of its stock. During that period, Dennis and Curtis, in
effect, treated the company as a "growth stock", reinvesting
earnings to increase the value of their shares in the company. A
hypothetical investor would have considered $2,788,575 growth in
equity to have been an exceptional performance for the 7-year
period from 1986 to 1992 ($176,489 beginning year equity in 1986
to $2,965,064 end of year equity in 1992).
As Mr. Reilly points out in his opinion, Dennis and Curtis
kept large amounts of cash in the company in order to build the
business. Rather than having the profits distributed to them,
they caused petitioner to retain the earnings, in effect,
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