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calculation in greater detail); Labelgraphics, Inc. v.
Commissioner, T.C. Memo. 1998-343, affd. 221 F.3d 1091 (9th Cir.
2000). Shareholder equity is either the corporation’s
shareholders’ equity at the beginning of that year, e.g., Alpha
Med., Inc. v. Commissioner, T.C. Memo. 1997-464 at n.8, revd. on
other grounds 172 F.3d 942 (6th Cir. 1999), the shareholders’
equity at the end of the year, e.g., Labelgraphics, Inc. v.
Commissioner, supra, or the year’s average shareholder equity,
e.g., Dexsil Corp. v. Commissioner, 147 F.3d 96, 99 (2d Cir.
1998), affg. T.C. Memo. 1995-135; see B & D Foundations, Inc. v.
Commissioner, supra. We shall apply the general ROE approach in
this case using petitioner’s shareholders’ equity at the
beginning of each tax year in issue.
Moreover, the parties do not agree on the appropriate time
period to determine whether petitioner’s shareholders’ ROE would
satisfy an independent investor. Petitioner argues that we
should review the entire period it has been incorporated.
Respondent argues that an independent investor would find the 10-
year period ending with 2000, the last year in issue, to be a
more accurate representation of its investment. If we were to
consider petitioner’s tax years outside of the 3 years in issue,
we would be inclined to review the entire period it has been
incorporated. However, given the facts of this case, an analysis
focused on the years in issue is more appropriate.
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