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the fair after-tax return from year to year, representing the
increase in theoretical retained earnings from October 31, 1985
through 1996, if a fair return was earned in each year through
1996 but no dividends were paid.
Mr. Reilly then added the actual executive compensation paid
to income before taxes in order to calculate the amount available
to pay a fair return on invested capital and compensation to
officers. Mr. Reilly used the income and executive compensation
reported on petitioner's Forms 1120. He then subtracted from
this subtotal a fair return on the stockholders' invested
capital. Under Mr. Reilly's analysis, the remainder (residual)
represents the amount available to pay the company's officers as
compensation for the results of their managerial efforts. Mr.
Reilly then calculated the difference between the amount
available to pay petitioner's officers and the actual officers'
compensation, which, in his opinion, represented the
undercompensation or overcompensation in each year.
Mr. Reilly calculated the amount of undercompensation or
overcompensation for the taxable years ending October 31, 1987
through 1996, as follows:
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