Vitamin Village, Inc. - Page 25

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          perspective of a hypothetical independent investor.  The prime              
          indicator is the return on the investor’s equity.  Id. at 1247.             
          If the company’s earnings on equity after payment of the                    
          compensation remain at a level that would satisfy an independent            
          investor, there is a strong indication that the employee is                 
          providing compensable services and that profits are not being               
          siphoned out of the company disguised as salary.31  Id.  The                
          Court of Appeals in Elliotts calculated the return on equity                
          using the yearend shareholders equity.  Id.  Dividing                       
          petitioner’s net income book value by the yearend shareholders              
          equity results in the following:                                            
                   FYE June 30         Percent return on equity                      
                    1995                     93 percent                               
                    1996                     25 percent                               
               Petitioner’s return on equity substantially exceeded the               
          guideline companies’ average return on equity of 5.9 percent and            
          -54.4 percent during the fiscal years at issue, respectively, and           
          exceeded each specific company’s return on equity.32  Mr. Reeves            
          was solely responsible for petitioner’s success and performed the           

               31 The Court of Appeals for the Ninth Circuit found that a             
          20-percent average rate of return on equity would satisfy a                 
          hypothetical inactive independent investor and indicated the                
          corporate employer and its shareholder/employee were not                    
          exploiting their relationship.  Elliotts, Inc. v. Commissioner,             
          716 F.2d 1241, 1247 (9th Cir. 1983), revg. T.C. Memo. 1980-282.             
               32 See the table showing each guideline company’s return on            
          equity supra p. 21.                                                         

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