- 109 -
1202; Unitary Mission Church v. Commissioner, 74 T.C. at 513.
But see Carter v. United States, 973 F.2d 1479, 1486 n.5
(majority opinion), 1489-1490 (Tang, J., concurring in part and
dissenting in part) (9th Cir. 1992).
The instant case does not involve an insider’s embezzlement
or any other kind of theft or use of assets unbeknownst to the
other insiders. What we conclude to be excessive compensation
resulted from what petitioner and W&H apparently believed the
Contract permitted or required. The fact that the Contract was
bargained for is a significant factor pointing toward
reasonableness. Sec. 1.162-7(b)(2), Income Tax Regs. However,
even under the standards of section 162(a)(1) the bargaining
factor does not by itself conclusively protect an arrangement
from a determination that the compensation was unreasonable; we
are required to consider all the circumstances. Sec. 1.162-
7(b)(3), Income Tax Regs.
Our examination of the other contracts provided by Herge, of
the multiplicity of compensation sources that W&H had under the
Contract, of the open-ended nature of W&H’s charges under the
Contract even though graduated fees were already being used in
the industry--and specifically by W&H in connection with AICR--
convinces us that the initial risk that W&H bore did not justify
so high a level of compensation. We are not holding that an
arm's-length arrangement that produces a poor result for an
organization necessarily would cause the organization to lose its
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