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disguising the distribution of dividends as compensation.”
Wagner Constr., Inc. v. Commissioner, T.C. Memo. 2001-160 (citing
Owensby & Kritkos, Inc. v. Commissioner, 819 F.2d at 1325-1326).
Respondent provided a chart that expressed the shareholder-
employees’ compensation as a percentage of gross receipts and net
pretax income for tax years ended June 30, 1990 through 2000.
With respect to the years in issue, respondent determined that
the shareholder-employees’ compensation was as follows:
Net income
Compensation before taxes
paid to and
TYE petitioner’s Gross shareholder
June 30 shareholders receipts Percent compensationPercent
1998 $600,000 $1,857,221 32% $673,651 89%
1999 592,727 1,688,437 35 548,980 108
2000 940,000 2,905,034 32 1,277,316 74
Petitioner argues that this factor should not be afforded much
weight because Darle, Rocky, and Dean each wore “three hats”--
directors, officers, and key employees–-which required them to
perform duties above and beyond their respective titles.
While we disagree with both parties’ analyses, we find this
factor favors respondent. The shareholder-employees’
compensation expressed as a percent of gross income was fairly
consistent in the years in issue and was a significant portion of
the net income. In some cases, the percentages may be less
indicative because the qualifications of the shareholder-
employees and the nature, extent, and scope of their work support
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