E.J. Harrison & Sons, Inc. - Page 8

                                        - 8 -                                         
          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:                        








Page:  Previous  1  2  3  4  5  6  7  8  9  Next

Last modified: May 25, 2011