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Petitioner’s return on equity (net income/shareholder equity
at the end of the year) during the subject years was 28.1 percent
and 50.1 percent, respectively (104,545/372,513;
382,789/754,857). Petitioner’s consistently high return on
equity resulted in an increase in shareholder equity from $7,000
to over $754,000 during petitioner’s short existence through
2000. We believe that returns of this magnitude would satisfy an
independent investor.
Respondent asserts that petitioner during the respective
subject years paid Beiner 31.3 and 38.7 percent of its gross
receipts and 88.3 and 69.9 percent of its net income (adding back
compensation). Respondent points the Court to Alpha Med. Inc. v.
Commissioner, 172 F.3d 942, 948 (6th Cir. 1999), revg. T.C. Memo.
1997-464, where the Court of Appeals for the Sixth Circuit held
that payments to a sole shareholder of 44.9 percent of gross
receipts and 64.6 percent of net income were unreasonable.
Respondent concludes that the compensation payments to Beiner
also were unreasonable.
We disagree with respondent that the mere fact that a
corporation pays its most valuable employee compensation in an
amount exceeding a certain percentage of gross receipts or net
income means that part or all of the compensation is
unreasonable. The amount of reasonable compensation that may be
paid to a corporate officer such as Beiner is a question of fact
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