- 23 -
concern, but she also incurred a substantial economic opportunity
cost, by sticking with this business for all of these years.”
That statement appears in the portion of Mr. Ostrove’s report
dealing with the independent investor test, and we assume that he
is referring to the investment return from some alternative
investment that Mrs. Harrison gave up (her “opportunity cost”)
when she decided to invest in (and stick with) petitioner. In
corporate finance, the term “opportunity cost” is generally used
to refer to financial investments (and not employment status).
See, e.g., Brealey & Myers, supra at 15 (defining “opportunity
cost” as “the return foregone by investing in * * * [a] project
rather than investing in securities”).
Mr. Ostrove states that “Mrs. Harrison’s compensation for *
* * [the audit years] did not exceed the amount needed to remedy
prior years of undercompensation, and was therefore reasonable.”
The only evidence of undercompensation is Mrs. Harrison’s
testimony that, for a year or so, when James and Ralph joined the
business in 1962, nobody received wages “because we needed that
money to grow.” Assuming arguendo that petitioner absorbed the
entire preincorporation business and took title to all of the
assets of that business, thereby becoming eligible to deduct
payments intended to compensate Mrs. Harrison for services
performed in a preincorporation taxable year, see Young v.
Commissioner, 650 F.2d 1083, 1085 (9th Cir. 1981), affg. T.C.
Memo. 1979-242; R.J. Nicoll Co. v. Commissioner, 59 T.C. 37, 50-
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