- 73 -
Taxation, General Explanation of the Revenue Provisions of the
Deficit Reduction Act of 1984, at 204 (J. Comm. Print 1984). The
independent investor test takes no account of the existence or
absence of an acquisition context. The conventional multifactor
test, which considers, inter alia, historical (preacquisition)
compensation as well as compensation paid by comparable companies
that have not been recently acquired, is better designed to
identify the amount of compensation that would have been paid
outside an acquisition context, and it is this amount that we
conclude Congress intended to treat as reasonable compensation
for purposes of section 280G(b)(4).38
38 Even if the independent investor test were applied in
this case, petitioner has failed to demonstrate by clear and
convincing evidence that its after-tax return on equity in 1992
would have been satisfactory to a hypothetical independent
investor.
Based on its audited financial statements, petitioner’s
after-tax return on equity for 1992 was negative. After making a
series of adjustments that purportedly eliminate the effects of
its acquisition and associated indebtedness, petitioner contends
that its return on equity was more than 20 percent in 1992. We
need not decide whether petitioner has demonstrated clearly and
convincingly that these adjustments are appropriate because, in
any event, petitioner has failed to demonstrate what the rates of
return for comparable companies would be if similar adjustments
were made to their earnings and stockholders’ equity.
Accordingly, even if an independent investor test were
applicable, petitioner has not shown that the compensation paid
to the Retained Executives was reasonable thereunder.
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