- 15 - 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.Page: Previous 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Next
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