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1999 2000
Excess gross profits $619,740 $1,219,270
Reasonable salary 166,000 166,000
Reasonable incentive 121,000 147,823
Total 906,740 1,533,093
As further support for his opinion, Wertlieb also calculated
and compared for petitioner and each of the 34 companies (1) the
percentage return on equity and (2) the ratio (expressed as a
percentage) of gross profit to sales. As to the former, Wertlieb
calculated petitioner’s pretax return on equity (taxable income
as ascertained by Wertlieb divided by ending shareholder equity)
as follows:
1999 2000
Sales $3,473,802 $3,485,568
Cost of goods sold 1,760 084 1,064,976
Gross profit 1,713,718 2,420,592
Gross profit at 90th percentile 1,093,978 1,201,322
Excess gross profit 619,740 1,219,270
Reasonable salary 166,000 166,000
Reasonable incentive 121,000 147,823
Total reasonable compensation 906,740 1,533,093
Officer compensation deducted 1,087,000 1,350,000
Over (under) reasonable 180,260 (183,093)
Taxable income, as reported 143,926 579,984
Adjusted taxable income 324,186 396,891
Shareholder equity at end of year 1372,857 754,857
Pretax return on equity 86.9% 52.6%
1 This amount was actually $372,513. We consider
the difference in figures immaterial to our analysis.
He compared these returns to the 34 companies as follows:
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