- 8 - relevant as part of a “continuing pattern of activity”, but they do not explain how the information has any relevance to the two- prong test for evaluating the deductibility of compensation under section 162. The Court of Appeals for the Seventh Circuit in Exacto Spring Corp. v. Commissioner, 196 F.3d 833 (7th Cir. 1999), has made it abundantly clear that we must use the independent investor test to ascertain whether a CEO’s compensation is reasonable in the first instance. Under the independent investor test, if a hypothetical independent investor would consider the rate of return on his investment in the taxpayer corporation “a far higher return than * * * [he] had any reason to expect”, the compensation paid to the corporation’s CEO is presumptively reasonable. Id. at 839. That presumption may be rebutted, however, if an extraordinary event was responsible for the company’s profitability or if the executive’s position was merely titular and his job was performed by someone else. Id. In Menard I, we concluded that the presumption could also be rebutted by evidence that comparable publicly traded corporations paid substantially less compensation to their CEOs than the amount paid by a closely held corporation, and we held that the presumption of reasonableness that attached to Mr. Menard’s TYE 1998 compensation had been rebutted by evidence that hisPage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Next
Last modified: May 25, 2011