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excessive compensation would noticeably decrease the rate of
return. Elliotts, Inc. v. Commissioner, 716 F.2d at 1245. It
would aid in the investor’s assessment of whether the total
compensation package paid by the corporation to all of its
employees is reasonable. If, like petitioner, however, the
corporation has more than one employee, its rate of return on
equity tells us nothing precise about the reasonableness of the
distribution of compensation among those employees. Moreover,
petitioner ignores the following caveat, in Elliotts, to the
application of the independent investor test:
A relevant inquiry is whether an inactive, independent
investor would be willing to compensate the employee as
he was compensated. The nature and quality of the
services should be considered, as well as the effect of
those services on the return the investor is seeing on
his investment. * * * [Id.]
By agreeing that a portion of Mrs. Harrison’s salary should be
disallowed as unreasonable compensation, the Court of Appeals for
the Ninth Circuit implicitly agrees with our finding that “an
independent investor in petitioner would object to the size of
Mrs. Harrison’s compensation”. E.J. Harrison & Sons, Inc. v.
Commissioner, T.C. Memo. 2003-239.
Considering the rulings and instructions of the Court of
Appeals, we find that the amounts of reasonable compensation paid
to Mrs. Harrison for the audit years are as follows:
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Last modified: May 25, 2011