- 36 -
CEO fixed by an independent board of directors of a publicly
traded company is more likely than not to represent legitimate
compensation established by the marketplace and not disguised
dividends. Although the Court of Appeals for the Seventh Circuit
made it abundantly clear in Exacto Spring Corp. that a trial
court should not ordinarily second-guess a corporation’s decision
regarding the compensation of its CEO as long as a satisfactory
rate of return on investment, adjusted for risk, is obtained for
shareholders, the Court of Appeals for the Seventh Circuit did
not extend the same criticism to the marketplace. In fact, the
Court of Appeals for the Seventh Circuit acknowledged the
reliability of compensation decisions by publicly traded
corporations but apparently was not presented with, nor did it
decide, whether evidence that comparable publicly traded
companies paid substantially less compensation to their CEOs was
sufficient to rebut the presumption of reasonableness that
attaches to the compensation paid to a CEO of a closely held
corporation like the one in this case.
To answer the question, we turn to section 1.162-7(b)(3),
Income Tax Regs., which provides:
In any event the allowance for the compensation
paid may not exceed what is reasonable under all the
circumstances. It is, in general, just to assume that
reasonable and true compensation is only such amount as
would ordinarily be paid for like services by like
enterprises under like circumstances. * * *
Page: Previous 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 NextLast modified: May 25, 2011