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conclude that extension of the Court of Appeals for the Seventh
Circuit’s independent investor test for determining reasonable
compensation under section 162(a) to the golden parachute context
would be contrary to congressional intent.
Our conclusion is buttressed by consideration of the
differing purposes served by sections 162(a)(1) and 280G(b)(4).
As pointed out by the Court of Appeals in Exacto Spring Corp.,
section 162(a)(1) is designed to address the problem created by a
closely held corporation’s controlling shareholder-employee’s
incentive to mischaracterize a nondeductible dividend as
deductible compensation for services. The independent investor
test addresses this abuse by testing the claimed compensation
against the result that market forces would produce: That is,
the compensation that an independent investor, not affected by
the tax incentives operating on an investor-employee, would be
willing to pay a corporate manager producing a given rate of
return.
In enacting section 280G, Congress set out to address a
different problem: The deleterious effect, in Congress’s view,
of golden parachute contracts on the acquisition process for
publicly traded corporations, because such arrangements
35(...continued)
corrected by 54 Fed. Reg. 29061 (July 11, 1989); sec. 1.280G-1,
Proposed Income Tax Regs., 67 Fed. Reg. 7654 (Feb. 20, 2002);
sec. 1.280G-1, Income Tax Regs.
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