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importantly petitioner paid its shareholder-employees annual
bonuses regularly, unlike its non-shareholder-employees. On the
basis of these facts, this factor favors respondent.
I. Petitioner’s Pretax Profit Margin
Petitioner claims that its pretax profit margin before
shareholder-employee compensation indicates that it was
exceptionally well managed. The pretax profit margin before
shareholder-employee compensation was calculated by dividing the
pretax net income before shareholder-employee compensation
expense by annual sales. Conversely, respondent argues that
petitioner’s mean pretax profit margins after shareholder
compensation for the years at issue and over a 10-year period
were virtually identical to the industry average.
After comparing petitioner’s pretax profit margin before
shareholder-employee compensation to RMA’s annual statement
studies, which were for SIC 1742, we find that petitioner had an
exceptional pretax profit margin before shareholder-employee
compensation for each tax year in issue. This indicates
petitioner’s shareholder-employees were deserving of high
compensation. However, we are mindful that petitioner’s pretax
profit margin after shareholder compensation was not exceptional,
and the compensation paid to petitioner’s shareholder-employees
depleted its earnings significantly. Nevertheless, we find this
factor to be neutral for each year in issue because the profit
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