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appreciation of their stock if the company retains earnings. See
Owensby & Kritikos, Inc. v. Commissioner, supra at 1326-1327;
Home Interiors & Gifts, Inc. v. Commissioner, 73 T.C. at 1161.
In reviewing the reasonableness of an employee's
compensation, a hypothetical independent investor standard may be
used to determine whether a shareholder has received a fair
return on investment after the payment of the compensation in
question. That leads us to consider whether an independent
investor would have approved the compensation in view of the
nature and quality of the services performed and the effect of
those services on the investor's return on his or her investment.
See Owensby & Kritikos, Inc. v. Commissioner, supra at 1326-1327;
see also Summit Sheet Metal Co. v. Commissioner, T.C. Memo. 1996-
563.
The prime indicator of the return a corporation is earning
for its investors is the return on equity. See Owensby &
Kritikos, Inc. v. Commissioner, supra at 1324. In his report,
Mr. Reilly provides rates of return that an independent investor
would expect to earn on his investment. From 1986 to 1996, the
following table shows: (1) The equity shown on petitioner's
financial statements; (2) Mr. Reilly's fair after-tax rate of
returns on equity that an independent investor would expect to
earn; (3) the fair after-tax returns on equity using Mr. Reilly's
rates; (4) petitioner's actual after-tax returns on equity; (5)
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