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petitioner’s shareholders return on equity increased to 93
percent and 25 percent in the fiscal years at issue,
respectively. These percentages were also substantially higher
than the guideline companies’ average, as discussed below.
Although petitioner’s business may not have been a complex
operation, this Court does not consider it to have been a simple
task for Mr. Reeves to operate petitioner as its sole executive
and manager. Neither petitioner’s sales nor its gross profits
could have been attained but for the personal skills of Mr.
Reeves.
D. Conflict of Interest
This factor examines whether a relationship exists between
the company and the employee which may permit the company to
disguise nondeductible corporate distributions as section
162(a)(1) compensation payments. Close scrutiny may be used when
the paying corporation is controlled by the compensated employee,
as in the instant case. Elliotts, Inc. v. Commissioner, supra at
1246-1247. However, the mere fact that the individual whose
compensation is under scrutiny is the sole shareholder of the
company, even when coupled with an absence of dividend payments,
“does not necessarily lead to the conclusion that the amount of
compensation is unreasonably high.” Id. at 1246.
The Court of Appeals for the Ninth Circuit formulated the
inquiry by evaluating the compensation payments from the
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