- 66 -
intended as compensation for services. We have found that for
both years in issue at least $385,000 is reasonable compensation
for Dennis as CEO and at least $250,000 is reasonable for Curtis
as COO. We think another corporation would pay those amounts to
Dennis and Curtis for their services.
We do not think, however, that an independent investor would
approve salaries in excess of $635,000, unless the investor were
receiving at least a fair return on his investment.
Mr. Reilly, petitioner's expert, determined that 28.2
percent would be a fair pre-tax return (18.6 percent after-tax
return) on equity in 1995. For 1995, an independent investor
would expect a pre-tax return of $819,123 ($2,904,692 beginning
year equity times fair pre-tax return of 28.2 percent). In 1995,
petitioner deducted $1,294,888 as officer compensation and
reported a net loss of $13,946. The $659,888 excess reported as
compensation ($1,294,888 less $635,000) is less than the fair
return and is, therefore, a nondeductible dividend.
Mr. Reilly determined that 26 percent would be a fair pre-
tax return (17.18 percent after-tax return) on equity in 1996.
For 1996, an independent investor would expect a pre-tax return
of $751,594 ($2,890,748 beginning year equity times fair pre-tax
return 26 percent). In 1996, petitioner deducted $1,099,765 as
officer compensation and had retained earnings of $243,132. The
$464,765 excess reported as compensation ($1,099,765 less
Page: Previous 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 NextLast modified: May 25, 2011