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percent, and for the tax year ended June 30, 2000, 41.3 percent.4
The average ROE for the 3 years in issue was 15 percent, which is
very close to our average assumed rate of return. The average
ROE is slightly less because in the tax year ended June 30, 1999,
petitioner had a negative ROE. However, the fact that
petitioner’s CEO received less compensation in that year than in
any of the previous 5 years and did not receive a bonus in that
year nullifies any negative inference we would have drawn.
Instead, these facts support the conclusion that Darle’s
compensation was in accord with performance, which was reasonable
for a CEO. Furthermore, petitioner’s ROE for the tax year ended
June 30, 2000, was substantial. Analyzing the ROE of the years
in issue together in this case eliminates anomalies created by
fluctuations in a given year. Therefore, looking at the years
before us together, we hold that this factor favors petitioner.
F. Comparison of Compensation to Gross and Net Income
Compensation as a percentage of a taxpayer’s gross and net
income has been considered in deciding whether compensation was
reasonable. See RTS Inv. Corp. v. Commissioner, 877 F.2d at 650.
The comparison of salaries to net income is more important
because it “more accurately gauges whether a corporation is
4We calculated ROE by dividing the year’s net income by the
year’s beginning total shareholder equity. We used the figures
in the financial documents included in the expert reports to
determine ROE.
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