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Exacto Spring Corp., the Court of Appeals for the Seventh Circuit
did not address the factual situation now before us where the
investors’ rate of return on their investment generated by the
taxpayer corporation, a closely held corporation, is sufficient
to create a rebuttable presumption that the compensation paid to
the corporation’s CEO is reasonable, but the compensation paid by
the taxpayer corporation to its CEO substantially exceeded the
compensation paid by comparable publicly traded corporations to
their CEOs. We turn to the opinion of the Court of Appeals for
the Seventh Circuit in Exacto Spring Corp. for guidance.
In Exacto Spring Corp. v. Commissioner, supra at 838, the
Court of Appeals for the Seventh Circuit stated as follows:
In the case of a publicly held company, where the
salaries of the highest executives are fixed by a board
of directors that those executives do not control, the
danger of siphoning corporate earnings to executives in
the form of salary is not acute. The danger is much
greater in the case of a closely held corporation, in
which ownership and management tend to coincide;
unfortunately, as the opinion of the Tax Court in this
case illustrates, judges are not competent to decide
what business executives are worth.
Implicit in the above statement is the apparent belief of the
Court of Appeals for the Seventh Circuit that compensation of a
34(...continued)
that we are required by sec. 1.162-7, Income Tax Regs., to
consider evidence of how the marketplace values the services of
comparably situated executives in deciding whether the
presumption of reasonableness has been rebutted, we shall treat
respondent’s concession as a concession that a presumption of
reasonableness arose and evaluate the evidence in deciding
whether Mr. Menard’s compensation was reasonable.
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