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support the level of compensation that was paid to Mr. Heitz and
still provide the minimum required return and that reasonable
compensation should, at most, be $592,500 and $621,400 for the
fiscal years 1993 and 1994, respectively. Respondent, however,
maintains that reasonable compensation does not exceed the
amounts allowed in the notice of deficiency ($380,952 and
$400,000 for the fiscal years 1993 and 1994, respectively).
Although we have approved of the use of an investor return
analysis in evaluating the reasonableness of compensation,
Diverse Indus., Inc. v. Commissioner, T.C. Memo. 1986-84, the
analysis here is flawed. Exacto's concession of over $1 million
in adjustments in each of the tax years was not taken into
account by respondent's expert in determining Exacto's after-tax
profit for purposes of the investor return analysis. In
calculating an investor's return, a company's actual performance,
not necessarily its reported underperformance, should be
considered. If Exacto's concessions are taken into account,
Exacto's after-tax return on equity would have been over 20
percent for each of the years at issue.
G. Characteristics of the Employer's Business
The final category identified by the Court of Appeals for
the Seventh Circuit concerns the peculiar characteristics of the
employer's business. Edwin’s, Inc. v. United States, 501 F.2d at
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