- 3 -
Hypothetical or Independent Investor Test
Petitioner argues that Lynn's compensation passes the
hypothetical investor test, asserting that "there is overwhelming
evidence in the record that Dexsil's financial performance would
have overjoyed a hypothetical investor." The data on which
petitioner relies, however, is ambiguous. As set forth in the
tables in the Court of Appeals' opinion, Dexsil Corp. v.
Commissioner, 147 F.3d at 99, petitioner's return on equity
varied substantially from year to year and declined for the years
in issue. By another calculation, the return on equity over the
time that the company was controlled by Lynn averaged an annual
rate of 15 percent. The increase was almost entirely in retained
earnings; dividends were an insignificant percentage of the
calculation. Lynn's salary and bonus, on the other hand,
increased substantially over the same years.
The only evidence at trial relating to the rate of return
acceptable to a hypothetical investor was petitioner's expert's
compilation of data on New York Stock Exchange companies. There
was no evidence, however, that those companies were comparable to
petitioner or that the average return of those companies would be
satisfactory to a hypothetical investor in a company with the
degree of risk associated with petitioner's business. There was
no analysis of the significance of dividends paid as contrasted
to unrealized appreciation. Thus, we could not determine that
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 Next
Last modified: May 25, 2011