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believe that an independent investor would have approved doubling
Steven Klein’s salary in 1995.
Citing Dexsil Corp. v. Commissioner, 147 F.3d at 102-103,
petitioner contends that Steven Klein’s salary increase from
$450,400 in 1994 to $820,400 in 1995 was reasonable because he
was performing his and Isidore Klein’s jobs. Petitioner’s
reliance on Dexsil is misplaced. In Dexsil, the U.S. Court of
Appeals for the Second Circuit directed the Tax Court to consider
whether compensation paid to a corporate president was reasonable
in light of the fact that he performed multiple roles and
compared to compensation paid by similar companies for comparable
services. See id. at 103. Steven Klein’s compensation in 1995
exceeded the total compensation paid to Isidore and Steven Klein
in 1994 by $7,000. Steven Klein admitted that he could not
perform Isidore Klein’s research and development activities as
well as Isidore Klein. Steven Klein testified that petitioner
would have had to pay someone $150,000-$250,000 to fill the
research and development position held by Isidore Klein. Dorf
provided market data showing that the annual compensation of a
research and development executive was $187,578 for 1993 and
$153,712 for 1994. We conclude that an independent investor
would not approve paying Steven Klein $150,000 in 1995 for
research and development activities that he admitted that he
could not perform as well as Isidore Klein.
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