Saturday, May 4, 2013

Exacto Spring Corporation v. Commissioner case brief

Exacto Spring Corporation v. Commissioner case brief
196 F.3d 833, 1999 U.S. App. 99-2 U.S. Tax Cas. (CCH) P50,964; 84 A.F.T.R.2d (RIA) 6977

CASE SYNOPSIS: Petitioner corporation appealed from the United States Tax Court decision holding that the chief executive officer's salary was unreasonably high and assessing a deficiency accordingly.

FACTS: In 1993 and 1994, petitioner, a closely held corporation, paid its cofounder, chief executive, and principal owner $ 1.3 million and $ 1.0 million, respectively, in salary. The Internal Revenue Service thought this excessive, reduced it by more than half, adding the difference to the corporation's income, and assessed a deficiency accordingly. The Tax Court found the maximum reasonable compensation roughly midway between his actual compensation and the IRS's determination, applying seven factors, all of which either favored the taxpayer or were neutral.

The appellate court reversed, calling the Tax Court conclusion "stunning," holding that remand was warranted because the Tax Court did not support its result with reasoning and the seven-factor test did not provide guidance to a rational decision. The appellate court applied an "independent investor" test, which petitioner met, resulting in the actual salary being held presumptively reasonable.

CONCLUSION: Judgment was reversed with directions to enter judgment for taxpayer, because the chief executive officer's salary met the independent investor test and was presumptively reasonable, and the Tax Court's contrary finding was not supported by the evidence.

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