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B. Controlling Factors
In Rapco, Inc. v. Commissioner, 85 F.3d 950, 954 (2d Cir.
1996), affg. T.C. Memo. 1995-128, the U.S. Court of Appeals for
the Second Circuit, the court to which an appeal in this case
would lie, stated five factors to be considered in assessing the
reasonableness of an employee's compensation: (1) The employee's
role in the taxpaying company, including the employee's position,
hours worked, and duties performed; (2) potential conflicts of
interest, such as the ability to “disguise” dividends as salary;
(3) the employer’s compensation policy for all employees; (4) the
character and financial condition of the company; and (5)
comparison of the employee's salary with those paid by similar
companies for similar services. No single factor controls.
These factors should be examined from the perspective of an
independent investor. See id. at 954-955; Dexsil Corp. v.
Commissioner, 147 F.3d 96, 100 (2d Cir. 1998), vacating and
remanding T.C. Memo. 1995-135.
Both parties called experts to testify about whether the
amount of compensation paid to the Kleins was reasonable.
Petitioner's expert was Paul Dorf (Dorf), and respondent's expert
was Scott D. Hakala (Hakala).
We next apply the factors listed above in deciding whether
the amount of compensation petitioner paid to the Kleins was
reasonable.
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