- 7 -
Commissioner, supra at 1245; Labelgraphics, Inc. v. Commissioner,
T.C. Memo. 1998-343, affd. 221 F.3d 1091 (9th Cir. 2000).
Petitioner argues that its return on equity “was a very solid
12.33%” during the audit years, and that return “is consistent
with the 14.9% average rate of return of comparably sized
companies testified to by the IRS’s expert”.1 Accordingly, it
continues: “[A]n independent investor would have been very
satisfied with the return on equity yielded by * * * [petitioner]
during the 1995, 1996 and 1997 fiscal years.” While all of that
may be true, it does not necessarily support petitioner’s
conclusion that reasonable compensation for Mrs. Harrison for the
audit years is as follows:2
Year Amount
1995 $860,682
1996 772,000
1997 378,000
Certainly, the corporation's rate of return on equity would be
relevant to a hypothetical independent investor in assessing the
reasonableness of compensation in a small corporation where
1 Petitioner calculates returns on equity of 41, 13, and
(17) percent for petitioner’s 1995, 1996 and 1997 fiscal years,
respectively, and a mean return on equity for those years of
12.33 percent.
2 Computed by reducing Mrs. Harrison’s compensation for
petitioner’s 1996 fiscal year to an amount that would make
petitioner’s return on equity for that year 14.9 percent, and
computed for 1997 (a loss year) by reducing her compensation to
$378,000, an amount approximately equal to the amount paid her
son, James.
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