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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 his
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