Yes. The old way of deciding if a salary was too high was a confusing checklist that didn't work well. A better way is the 'happy investor test.' The tax rule exists to stop companies from hiding their profits (which get taxed) by calling them 'salaries' (which don't get taxed). But if the company's owners are already making great profits, they are happy. They wouldn't agree to a salary that was secretly stealing from their profits. Because Exacto's owners were making a 20% profit when they only expected 13%, Mr. Heitz's high salary was obviously worth it and should be allowed as a business expense.

Yes, the money paid to William Heitz can be subtracted as a fair business cost. I think the way the tax court decided was too complicated and confusing. Instead, we should look at whether the company's owners are making good money. If they are, then it's probably okay to pay the boss a lot. In this case, the owners of Exacto were making much more money than they expected, even with Heitz's big salary. Also, Heitz did many important jobs for the company, and the other owners thought his pay was fair. So, I say Exacto should be allowed to subtract all of Heitz's pay from its taxes.

Yes, an executive's high salary is presumptively reasonable and deductible when the corporation's investors receive a high rate of return on their investment. The court rejects the traditional, nondirective seven-factor test as vague, arbitrary, and an improper invitation for judges to act as 'superpersonnel departments.' The primary purpose of § 162(a)(1) is to prevent corporations from disguising non-deductible dividends as deductible salary. The independent investor test provides a more objective, market-based framework by asking what a rational investor would be willing to pay a manager. If investors are receiving a high rate of return, it is implausible that they would be better off with a lower-paid, and likely less effective, manager. Here, the investors' 20% return on equity was significantly higher than the 13% benchmark for a similar company, creating a strong presumption that Heitz's salary was reasonable. As there was no evidence to rebut this presumption, the compensation should have been allowed in full.

Yes, the compensation paid to William Heitz is deductible as an 'ordinary and necessary' business expense. I reject the multi-factor test used by the Tax Court because it is nondirective, unclear, and invites arbitrary decisions. Instead, I advocate for the 'independent investor' test, which is simpler and more purposive. Under this test, if the company's investors are receiving a high rate of return, the executive's salary is presumptively reasonable. In this case, Exacto's investors received a return of more than 20%, which is significantly higher than the 13% expected return. This high return, combined with Heitz's unique and valuable contributions to the company, strongly suggests that his compensation was reasonable. The fact that other major shareholders approved Heitz's salary further supports its reasonableness. Therefore, I reverse the Tax Court's judgment and direct that judgment be entered for the taxpayer.

Exacto Spring Corporation v. Commissioner of Internal Revenue

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