t c no united_states tax_court square d company and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date p was a publicly held u s_corporation and after its acquisition by a foreign_corporation s through a reverse subsidiary merger was a u s_corporation indirectly owned by s during the years in issue to finance the acquisition of p s obtained a commitment from two banks to extend loans to a to-be- organized subsidiary equal to one-half the acquisition price not to exceed dollar_figure5 billion the subsidiary was created for the purpose of acquiring p it was to use the loan proceeds to purchase p’s outstanding shares at which time it would merge into p and cease to exist as consideration for the banks’ commitment s became obligated to pay the banks a loan commitment fee and to indemnify the banks for any legal fees incurred in connection with their agreement to extend credit for the acquisition the subsidiary formally assumed s’s obligations with respect to the banks’ legal fees and became obligated to pay a portion of the loan commitment_fees after initially resisting the acquisition p agreed to it and as a consequence of the merger assumed the subsidiary’s obligations p paid the legal fees directly s invoiced p for the full cost of the loan commitment fee and p reimbursed s for those costs in a subsequent year held p is entitled to amortization deductions for its payments for the loan commitment and legal fees because by virtue of its merger with s’s subsidiary the costs were incurred on p’s behalf and eventually paid_by p in prior to s’s acquisition of p certain executives of p who were disqualified individuals within the meaning of sec_280g i r c obtained employment agreements agreements under which they were entitled upon a change in ownership or control of p to certain lump-sum payments if they chose to terminate their employment during the 13th month after the acquisition or if their employment was involuntarily terminated within years of the acquisition the lump-sum payments would have been parachute payments within the meaning of sec_280g i r c s’s acquisition of p in date triggered the executives’ rights to the parachute payments under the agreements s sought to retain the executives’ services for p beyond the 13th month after the acquisition rather than have the executives terminate their employment at that time to obtain the parachute payments to that end s negotiated new employment agreements agreements with the executives the executives used their rights to parachute payments under the agreements as leverage to secure lump- sum payments under the agreements the lump-sum payments provided in the agreements were larger than the parachute payments and further were conditioned on the executives’ either remaining in petitioner’s employment or ceasing employment only under specified circumstances for approximately years through the agreements were subsequently amended to accelerate the payment of the lump sums in a reduced_amount to date in exchange for an extension of the employment term for an additional year through held under the facts of this case the lump-sum payments excluding a portion conceded by r to be otherwise paid under the agreements as amended were contingent on a change in ownership or effective_control within the meaning of sec_280g i r c because they would not have been made but for the change in ownership or control the phrase contingent on a change in the ownership or effective_control of sec_280g i r c is interpreted in light of legislative_history accordingly the payments are parachute payments for purposes of sec_280g i r c held further whether p has established that any portion of the parachute payments was reasonable_compensation for purposes of sec_280g i r c must be determined on the basis of a multifactor test considering all the facts and circumstances 196_f3d_833 7th cir revg heitz v commissioner tcmemo_1998_220 applying an independent_investor_test to determine reasonable_compensation for purposes of sec_162 i r c distinguished held further extent to which p has met burden of showing by clear_and_convincing evidence that any portion of parachute payments was reasonable_compensation within the meaning of sec_280g i r c determined robert h aland gregg d lemein tamara l meyer oren s penn david g noren john d mcdonald and holly k mcclellan for petitioner lawrence c letkewicz and dana e hundrieser for respondent contents findings_of_fact i background ii loan commitment and legal fees arising from acquisition of petitioner the commitment letter a takeover events and litigation b c commitment letter addendum the bridge loan d the term_loan e f payment of the commitment and legal fees d a b c iii executive compensation background employment agreements importance of schneider’s retaining petitioner’s key executives negotiations between retained executives and schneider over new employment agreements employment agreements mr garrett’s termination the amendments e f g h other compensation of retained executives i retained executives’ pre- and postacquisition compensation retained executives’ duties and responsibilities j iv tax returns notice_of_deficiency and petition opinion i loan commitment and legal fees a b the legal_obligation to pay the loan costs reimbursed expenses ii parachute payments a general requirements of sec_280g b whether payments were contingent on a change in control c reasonable compensation--applicable test d determination of reasonable_compensation overview of expert testimony historical compensation analysis of comparables a b c d e f relevant period for reasonable_compensation comparison aggregate versus individual compensation retained executives’ compensation i perquisites ii ltip compensation iii srp benefits iv summary determination of comparable executives and their compensation i selection of comparable companies ii selection of comparable executives and their compensation range of reasonable_compensation reasonable_compensation established for each retained executive i mr brink ii mr denny iii mr kurczewski iv messrs garrett richardson thompson and williams aa mr garrett bb mr richardson cc mr thompson dd mr williams messrs francis free hite and pugh v gale judge respondent determined deficiencies in petitioner’s federal income taxes of dollar_figure dollar_figure and dollar_figure for the taxable years and respectively petitioner claims overpayments of dollar_figure and dollar_figure for taxable years and respectively after concessions the issues remaining for decision1 are whether petitioner may deduct in a loan commitment fee incurred in connection with the provision of financing for petitioner’s acquisition we hold that petitioner may whether petitioner may deduct in legal fees incurred in connection with the provision of financing for petitioner’s acquisition we hold that petitioner may whether certain lump-sum payments made by petitioner to senior executives in and deducted in that year were contingent on a change in the ownership or effective_control of petitioner within the meaning of sec_280g we hold that they were what part if any of the foregoing payments constituted reasonable_compensation in within the meaning of sec_1 an additional issue involving the application of sec_267 has been addressed in a separate opinion see 118_tc_299 unless otherwise noted all section references are to the internal_revenue_code in effect for taxable years and and all rule references are to the tax_court rules_of_practice and procedure 280g b a we hold that petitioner has established that a portion of the payments was reasonable_compensation i background findings_of_fact some of the facts have been stipulated and are so found we incorporate by this reference the stipulation of facts the first and second supplemental stipulation of facts and accompanying exhibits square d co a delaware corporation with its principal executive offices in palatine illinois is the common parent of an affiliated_group_of_corporations making a consolidated_return collectively petitioner prior to its acquisition by schneider s a schneider discussed below petitioner was a publicly held company whose stock was traded on the new york stock exchange during the years in issue petitioner was engaged in the united_states and abroad in the manufacture and sale of electrical distribution and industrial control products electrical distribution products included items such as circuit breakers safety switches transformers and surge suppressors industrial control products included push buttons relays control switches voltage controls data communication systems power protection systems and computerized control and data gathering systems by square d was a well-regarded brand in the electrical equipment industry throughout north america during the years in issue schneider a french corporation with its principal executive offices in paris france was through its subsidiaries a multinational manufacturer and marketer of electrical distribution and industrial control equipment among other activities schneider owned directly or indirectly five major subsidiaries including merlin gerin s a mgsa and telemecanique s a tesa both french corporations ii loan commitment and legal fees arising from acquisition of petitioner a the commitment letter around late or early schneider began taking steps to initiate a hostile takeover of petitioner in this regard schneider sought financing from two french banks societe generale and banque paribas collectively the french banks the french banks sent schneider a commitment letter dated date commitment letter in which they agreed subject_to various conditions to provide a bridge or temporary loan bridge loan to a to-be-organized subsidiary for the purpose of acquiring petitioner equal to one-half of the purchase_price of petitioner up to a maximum of dollar_figure billion and underwrite permanent financing of one-half of the purchase_price of petitioner up to a maximum of dollar_figure million the term_loan as consideration for the french banks’ financing commitment the commitment letter required schneider to pay a nonrefundable loan commitment fee equal to percent per annum on dollar_figure billion payable monthly in advance from the date that receipt of the commitment letter was acknowledged by schneider date until the bridge loan was disbursed but no later than date the commitment letter set forth the basic schneider and its subsidiaries agreed to provide the remainder of the acquisition price to its acquisition subsidiary in the form of capital contributions and subordinated loans the commitment letter addressed to schneider specifically stated at section d a your company shall pay our two banks a commitment fee of per annum payable monthly in advance from the date of acknowledgment of the receipt of their commitment letter until the bridge loan is disbursed on usdollar_figure one billion u s dollars the maximum amount specified for the bridge loan any commitment fee received shall become the property of the banks the receipt of this commitment fee shall cease upon extension of the bridge loan or not later than date barring an extension approved by our two banks and your group the commitment letter further provided that your company guarantees that it will have this letter signed by merlin gerin telemecanique ie mgsa and tesa and s p e_p schneider’s controlling shareholder in a section entitled groupe schneider’s commitments the commitment letter stated your group ie schneider and the subsidiaries subject_to consolidation agrees not to proceed to acquire new interests other than those of continued terms of the bridge and term loans including commitment_fees of percent per annum on any amounts of the bridge or term loans not disbursed schneider also agreed to indemnify the french banks for any legal fees associated with their agreement to commit funds to schneider a letter from schneider to the french banks which the commitment letter required contained the following provision we herewith declare that our company agrees to indemnify your two banks as to all the costs expenses or liabilities or sic any kind whatsoever arising from the credit facility the commitment letter specified that the bridge and term loans would be made to a schneider subsidiary that was to be newly organized for the purpose of acquiring petitioner thus while schneider obtained the commitment to finance it never intended to be the borrower b takeover events and litigation on date schneider submitted to petitioner’ sec_4 continued petitioner in net annual amounts greater than its annual consolidated available cash_flow your company guarantees compliance with this provision by all the subsidiaries in which it has a controlling_interest to permit our two banks to monitor this commitment on the part of your group your company and s p e_p will provide them with all the necessary accounting data board_of directors a proposal to acquire all outstanding shares of petitioner’s stock for dollar_figure per share or a total purchase_price of approximately dollar_figure billion petitioner’s board_of directors rejected the proposal on date and the next day petitioner filed complaints in federal district_court and new york state court designed to thwart the schneider takeover the french banks were named as codefendants in the federal complaint on date schneider mgsa and tesa organized square d acquisition co acq as a transitory entity to serve as a vehicle for the acquisition of petitioner schneider mgsa and tesa together owned percent of acq on date acq made a hostile cash tender offer of dollar_figure per share tender offer to petitioner’s shareholders on date petitioner’s board_of directors rejected the tender offer as inadequate and recommended that petitioner’s shareholders do the same on date petitioner filed a petition with the board_of governors of the u s federal reserve system requesting a determination that the role of the french banks in the tender offer violated u s banking laws and regulations banque paribas incurred legal costs with respect to the petition as well as the federal and state actions discussed above on date schneider indicated it was willing to increase the price of the tender offer and on date officials of both companies agreed on a price of dollar_figure per share revised tender offer the following day may petitioner’s board_of directors approved and recommended to petitioner’s shareholders the revised tender offer which amounted to a total purchase_price of approximately dollar_figure billion petitioner and schneider also agreed to dismiss with prejudice with each party bearing its own costs and litigation expenses all pending proceedings between petitioner schneider acq and their respective affiliates including the action filed in federal district_court naming the french banks as codefendants the action filed in new york state court and the petition filed with the federal reserve that same day may petitioner schneider and acq entered into an agreement and plan of merger merger agreement c commitment letter addendum to finance the higher acquisition price in the revised tender offer schneider and the french banks executed an addendum to the commitment letter on date in which the french banks agreed to increase the bridge and term loans by an additional dollar_figure million for a total loan commitment of dollar_figure5 billion or one-half of the revised acquisition price of dollar_figure billion commitment letter addendum the commitment letter addendum specifically provided that the conditions enumerated in section d a of the commitment letter ie schneider’s obligation to pay loan commitment fee see supra note applied to the additional funds described in the commitment letter addendum d the bridge loan on date the french banks and acq as borrower entered into the bridge loan agreement contemplated by the commitment letter the french banks agreed to lend acq dollar_figure5 billion to purchase petitioner’s outstanding shares sec_2 of the bridge loan agreement provided commitment fee on date the borrower acq agrees to pay to societe generale for distribution pro_rata to each of the banks according to its commitment a commitment fee from and including the date of signature hereof date to and including date or such earlier date as the total commitments of the banks shall have been terminated the commitment fee shall be payable in u s dollars at the rate of three tenths of one percent per annum on the daily average unutilized amount of the commitment of the banks during such period the bridge loan agreement contained no provisions under which acq assumed schneider’s obligation to pay a loan commitment fee under the commitment letter or by which schneider was relieved of it sec_5 schneider and its subsidiaries agreed to provide the remainder of the acquisition price to acq in the form of capital contributions and subordinated loans obligation to pay a commitment fee from date until the bridge loan was disbursed regarding the legal fees the bridge loan agreement stated the borrower acq shall iii indemnify each bank its officers directors employees representatives and agents from and hold each of them harmless against any and all losses liabilities claims damages or expenses_incurred by any of them arising out of or by reason of any investigation litigation or other proceeding related to the acquisition or the borrower’s or any other party’s entering into and performance of this agreement including the reasonable fees and disbursements of counsel incurred in connection with any such investigation litigation or other proceeding the french banks disbursed the bridge loan of dollar_figure5 billion to acq on date e the term_loan on date petitioner signed the term_loan agreement and the french banks and a syndicated group of other banks disbursed the funds that same day the term_loan agreement contained language regarding the payment of a commitment fee and legal expenses similar to that contained in the bridge loan agreement petitioner used the term_loan proceeds to repay the bridge loan made to acq effective date acq merged acquisition was defined in the bridge loan agreement as acq’s acquisition of petitioner’s capital and preferred_stock pursuant to the offer of purchase dated date as supplemented acq used the proceeds of the bridge loan together with schneider’s capital contributions and subordinated loans to acquire petitioner’s shares pursuant to the revised tender offer into petitioner which assumed acq’s obligations as the surviving corporation under the terms of the merger petitioner’s shareholders who had not tendered their shares received cash for their shares after the merger schneider indirectly owned percent of petitioner’s shares f payment of the commitment and legal fees schneider paid a dollar_figure commitment fee to the french banks and in date sent an invoice for reimbursement of that amount to petitioner in date petitioner paid dollar_figure to schneider as reimbursement in date rogers wells submitted an invoice to banque paribas for dollar_figure covering services performed and costs incurred in the period of march through date relating to the litigation and federal reserve board proceedings banque paribas forwarded the rogers wells invoice to schneider in date and petitioner paid it in september of that year iii executive compensation a background in date prior to its acquisition by schneider petitioner as a result in part of concerns about a possible the form of this transaction is typically known as a reverse subsidiary merger see ginsburg levin mergers acquisition and buyouts par pincite hostile takeover entered into employment agreements employment agreements with its most senior executives for several years prior to the execution of the employment agreements petitioner’s senior executives had received an industry-typical executive compensation package which included salary participation in a short-term incentive compensation plan stip restricted_stock including dividends on such stock nonqualified_stock_options and perquisites the stip was awarded annually and guaranteed each executive a bonus if certain company performance objectives were met petitioner also maintained a supplemental retirement_plan srp for certain executives including the senior executives noted above who were also participants in petitioner’s qualified_pension plan the purpose of the srp was to provide supplemental retirement benefits to selected key executives b employment agreements the employment agreements provided for a 3-year employment period that was triggered by a change_of control defined in the agreements to include the acquisition of percent or more of the common_stock or voting power of petitioner the parties have stipulated that a change_of control both for purposes of triggering the 3-year employment period provided in the employment agreements and for purposes of sec_280g occurred on date the employment period provided under the employment agreements therefore began on date and ended on date the employment agreements further provided for substantial lump-sum payments to an executive in the event his employment was either terminated by petitioner without cause9 or by the executive for good reason good reason for this purpose included generally any diminution in the executive’s preacquisition position or duties any change in the executive’s employment location or required travel or any failure to be paid the compensation provided in the agreement the executive’s good_faith determination regarding whether the elements of good reason obtained was conclusive further the employment agreements provided that any reason would be deemed good reason during the 30-day period following the first anniversary of the change in control ie may through date hereafter the date window thus the employment agreements granted each executive who entered them substantial payments if during the years after a change in control the executive i was involuntary terminated without cause ii ceased employment voluntarily upon a modification of his duties cause was defined for this purpose as generally the executive’s willful and continued failure to perform his duties with the company or his willful engagement in gross misconduct materially injurious to the company or illegal conduct location or travel burden or iii at his complete discretion ceased employment during the date window the payment to which an executive became entitled under the employment agreements upon the occurrence of any of the foregoing contingencies was a lump sum consisting of a unpaid annual salary stip award deferred_compensation and vacation pay accrued but not paid through the date of termination b a payment termination award defined as an amount equal to three times the sum of his annual salary and highest stip award and c a payment srp cashout equal to the greater of i the present_value of his accrued_benefits under the srp or ii the present_value of a monthly benefit equal to a percentage of the executive’s final average monthly compensation as defined in the srp based on the total of his age and years_of_service less the present_value of any benefit which the executive was entitled to receive under petitioner’s qualified_pension plan payment of the srp cashout would have fulfilled petitioner’s obligations to the executive under the srpdollar_figure seven of the senior executives who were parties to the employment agreements terminated their employment either if the executive’s employment was terminated by petitioner for cause or by the executive without good reason during the 3-year employment period the executive was entitled to receive only accrued but unpaid annual salary deferred_compensation and certain other_benefits he was not entitled to receive either the termination award or the srp cashout voluntarily or involuntarily in or in one case and received the termination award and srp cashout under the employment agreements petitioner treated these payments as parachute payments for purposes of sec_280g the remaining senior executives who were parties to the employment agreements retained executives entered into new employment agreements with petitioner on date employment agreements covering their services after that date which replaced the employment agreementsdollar_figure the employment agreements are described more fully hereinafter the retained executives and their pre- and post-control-change titles were as follows two retained executives did not execute their employment agreements until early name preacquisition title postacquisition title william p brink corporate vice president vice president chief financial controller officer and controller charles w denny executive vice president executive vice president chief electrical distribution operating officer sector philip h francis corporate vice president vice president corporate corporate technology technology and quality center dexter s free corporate vice president corporate vice president treasurer and assistant treasurer and assistant secretary secretary john c garrett executive vice president executive vice president industrial sector industrial controls charles l hite corporate vice president corporate vice president human resources human resources walter w kurczewski corporate vice president corporate vice president general counsel and general counsel and secretary secretary david l pugh vice president general vice president general manager manager power equipment equipment business unit business chris c richardson vice president general vice president general manager manager utilities utilities business business and president anderson prods clive n thompson vice president distribution vice president distribution equipment business unit equipment business unit robert d williams vice president general vice president general manager manager transformer transformer business business c importance of schneider’s retaining petitioner’s key executives one of schneider’s top priorities after its acquisition of petitioner was to retain key executives of petitioner in order to assure petitioner’s continued successful business operations and protect schneider’s dollar_figure billion investment schneider had been advised by a management consultant that retaining petitioner’s current management would be critical to the company’s continued success in the event it was acquired by schneider moreover schneider’s management did not believe it could feasibly replace petitioner’s existing management team with french executives from schneider affiliates or with executives recruited from other u s companies in the electrical equipment industry d negotiations between retained executives and schneider over new employment agreements schneider’s chairman was aware from petitioner’s sec filings that the employment agreements provided for substantial lump-sum payments for several of petitioner’s executives if they decided to terminate their employment with petitioner following the 1-year anniversary of petitioner’s acquisition by schneider he feared that the employment agreements provided incentives for the executives to leave and wanted to devise alternative compensation arrangements that would create incentives for the executives to remain employed by petitioner beyond the first year after the acquisition the departure of the retained executives during date would have posed substantial risks to petitioner’s continued successful business operations and schneider’s chairman was prepared to pay a premium in order to keep the retained executives the employment agreements had a significant impact on schneider’s negotiations with the retained executives over new employment agreements an executive compensation consultant retained by schneider advised it regarding compensation proposals that would preserve the present_value of the parachute payments to which the retained executives were entitled under the employment agreements the retained executives’ entitlement to the termination awards and srp cashouts under the employment agreements gave them additional leverage in their negotiations with schneider over the terms of their future employment from july to date schneider’s chairman met with the retained executives and attempted to convince them to remain in the employment of and enter into new agreements with petitioner the retained executives were presented with a compensation proposal containing an integration long-term incentive plan integration ltip which required revocation of the employment agreements and granted a performance award of up to percent of each executive’s salary the retained executives reacted negatively to this proposal concluding in a july meeting that the proposal attached too much risk to future compensation payments given the termination award and srp cashout payments guaranteed to each executive under the employment agreements as one of the retained executives remarked at this meeting a bird in the hand is worth two in the bush that same day petitioner’s chairman wrote schneider’s chairman explaining that the retained executives were disappointed with schneider’s compensation proposal and suggesting that the golden_parachutes contained in the employment agreements be cashed out as a prerequisite to entering into new employment contracts with the retained executives schneider’s position as articulated in a fax sent that day by schneider’s chief financial officer to schneider’s executive compensation consultants remained that schneider intended to stick to a proposal that would put most of the money ahead of the executives and not behind them the next day one retained executive wrote to schneider’s chief financial officer on behalf of the group stating that one way or the other the parachute payments will be paid and that not one officer is willing to give up what they are entitled to under their employment agreement contract the letter further stated that the decision by schneider is very simple pay now or pay later by date schneider had revised its executive compensation plan but bonus payments under its integration ltip which were intended to compensate the retained executives for forgoing their termination awards and srp cashout were still based on future company performance the plan was again revised on date but the performance component remained mr hite a retained executive who had been assigned to negotiate on behalf of the group continued to meet with schneider’s representatives throughout august and september in an effort to arrive at a mutually acceptable compensation arrangement for periods after by the beginning of october schneider had agreed to drop the proposal for an integration ltip based on future company performance and to develop instead a retention award plan tied to the length of future employment as originally proposed by schneider the retention award plan would have provided each retained executive a bonus of percent of base salary plus a stip award if that executive remained with petitioner through date the bonus percentage would have increased to percent if certain company performance objectives were met as more fully described below the final agreement reached by schneider and the retained executives provided for awards payable to each retained executive based on specified periods of service without regard to future company performance but with a minimum or floor amount designed to compensate the retained executives for the relinquishment of their rights to termination awards and srp cashouts under the employment agreements e employment agreements the retained executives entered into the employment agreements on november dollar_figure the employment agreements nullified and replaced the employment agreements messrs francis and richardson did not enter new employment contracts until early but their agreements were essentially the same as the agreements signed by the other retained executives hereinafter unless otherwise noted the term employment agreements shall include the agreements signed by messrs francis and richardson in early by signing the employment agreements the retained executives surrendered their rights to termination awards and srp cashouts under the employment agreements petitioner and the retained executives had no explicit or implicit legal_obligation under the employment agreements or any other agreements to enter into the employment agreements there were no understandings between schneider and the retained executives prior to the change in control with regard to their continued employment by petitioner after the change in control other than that contained in the employment agreements the employment agreements established a fixed employment period for each retained executive from the date of the agreement through date unless terminated sooner in accordance with the provisions of the agreement the employment agreements generally increased the base salaries for each retained executive and provided for a 20-percent increase in base salaries and an annual bonus ie stip award the employment agreements also entitled each retained executive to participate in a long-term incentive compensation plan ltip the employment agreements further provided that if a retained executive remained continuously employed by petitioner until date he would receive a lump-sum payment retention payment equal to times his base salary plus targeted stip award13 for and a payment of his supplemental retirement benefits srp benefit equal to the greater of a the srp cashout if any that would have been payable as of date under his employment agreement if petitioner had terminated him without cause under his employment agreement on that date plus interest from date through the date of payment or b his vested accrued srp benefit as of the date of termination in either case reduced by any amount previously paid to the retained executive under the srp any srp benefit paid to a retained executive would be treated as an offset against any future srp benefits which that retained executive might become entitled to receive the srp benefit plus interest for each retained executive exceeded the amount of his vested accrued srp benefit on date if a retained executive’s employment was terminated prior to date either by petitioner without cause or by the executive for good reason the executive would receive his srp benefit plus interest and a prorated retention payment computed by multiplying the same base of salary and stip the targeted stip award equaled the stip award an executive would have received if petitioner achieved but did not exceed the financial objectives in its business plan in the case of mr richardson the operative date was date award by a multiplier of rather than plus for each week of employment completed after date not to exceed dollar_figure cause and good reason for purposes of the employment agreements were defined in all material respects as in the employment agreements except that good reason no longer included a change in the executive’s travel burden and the executive’s good_faith determination of good reason was no longer conclusive in addition there was no comparable provision in the employment agreements to the effect that any reason constituted good reason during a specified period under the employment agreements an executive who terminated his employment for good reason or was dismissed by petitioner without cause on the day the agreements took effect would have been entitled to his srp benefit plus interest and a prorated retention payment computed as the sum of the retained executive’s base salary and targeted stip award for for mr francis the factor equaled plus for each week of employment completed after date for mr richardson plus for each week of employment completed after date a retained executive whose employment was terminated by petitioner for cause or by the executive without good reason would forfeit his right to a retention payment but not his srp benefit which would be paid to him along with accrued but unpaid annual salary if he left voluntarily for good reason but not involuntarily for cause he would in addition receive a payment equal to percent of the sum of his salary and target stip for multiplied by a factor equal to because the number of weeks worked after the stated date would have been zero the prorated retention payment so payable exceeded the termination award to which each retained executive would have been entitled under the employment agreements if he had elected to terminate employment with petitioner during the date window a comparison of the termination award payable to each retained executive under the employment agreements upon a date elective termination with the prorated retention payment payable at the inception of the employment agreements follows for mr francis the factor would have been termination award retention payment payable payable under at inception of employment agreements employment agreements brink dollar_figure dollar_figure denny big_number big_number francis big_number big_number free big_number big_number garrett big_number big_number hite big_number big_number kurczewski big_number big_number pugh big_number big_number richardson big_number big_number thompson big_number big_number williams big_number big_number f mr garrett’s termination effective date petitioner terminated the employment of mr garrett without cause and made a prorated retention payment and srp benefit payment in date under the provisions of his employment agreement g the amendments on date in anticipation of proposed increases in individual income_tax rates and proposed limitations on the deductibility of executive compensation_for federal_income_tax purposes petitioner and the retained executives other than mr garrett executed amendments to the employment agreements amendments the amendments extended the employment period provided by the employment agreements by year from date to date and provided for the early payment of the retention payment and srp benefit on or before date instead of date under the amendments the retention payment payable at yearend was computed as the portion of the retention payment that a retained executive would have received under the employment agreement if he had terminated his employment for good reason or if petitioner had terminated his employment without cause on date in addition the amendments contained a clawback clause which provided that if a retained executive’s employment was terminated by petitioner for cause or by the retained executive for other than good reason prior to date the executive was obligated to repay the entire retention payment that he had received in plus interest finally the amendments provided that petitioner would pay the srp benefit plus interest as provided in the employment agreements on or before date no clawback clause or comparable provision applied to the srp benefit paid under the amendments in the event a retained executive’s employment ceased prior to the expiration of the employment period on date pursuant to the employment agreements as amended by the amendments petitioner paid retention payments and srp benefits including interest to the retained executives in date as follows srp retained retention srp total executive payment benefit interest total_payment brink dollar_figure dollar_figure denny big_number dollar_figure dollar_figure dollar_figure big_number francis big_number big_number big_number big_number big_number free big_number big_number big_number big_number big_number garrett1 big_number big_number big_number big_number big_number hite big_number big_number big_number big_number big_number kurczewski big_number big_number big_number big_number big_number pugh big_number big_number richardson big_number big_number big_number big_number big_number thompson big_number big_number williams big_number big_number big_number big_number big_number total big_number big_number big_number big_number big_number mr garrett was terminated by petitioner without cause effective date and did not enter into a amendment the figures for him are amounts paid under his employment agreement as a result of his termination in date the following table compares the termination awards payable under the employment agreements had a retained executive elected to terminate employment with petitioner during the date window the prorated retention payment payable at the inception of the employment agreements and the prorated retention payment actually paid under the employment agreements except with respect to mr garrett in date termination award retention payment retention payment retained payable under payable at inception of paid in date executive employment agreement employment agreement under amendment brink dollar_figure dollar_figure dollar_figure denny big_number big_number big_number francis big_number big_number big_number free big_number big_number big_number garrett big_number big_number big_number hite big_number big_number big_number kurczewski big_number big_number big_number pugh big_number big_number big_number richardson big_number big_number big_number thompson big_number big_number big_number williams big_number big_number big_number for mr garrett this figure was paid under his employment agreement as a result of his termination in date h other compensation of retained executives in the retained executives earned in addition to the retention payments and srp benefits paid to them in december a salary stip award and perquisites also the employment agreements provided that each retained executive was entitled to participate in an ltip that was to be devised the ltip was finalized and copies were provided to each retained executive on date certain retained executives were actively involved in the development of the ltip arrangements and received relevant documents including drafts during the ltip was designed to motivate petitioner’s executives to achieve petitioner’s long-term financial objectives the ltip was based on performance over the 3-year period and an award thereunder was equal to a percentage of the sum of a retained executive’s annual base salary for each year in the period ltip awards were paid in date for the performance cycle a pro_rata portion of the ltip award was generally earned by each retained executive in each year of the performance cycledollar_figure the if an executive eligible for an ltip award left voluntarily before the end of a performance cycle he would forfeit his award if involuntarily terminated he would receive a partial payment of his award at the discretion of schneider executives if he reached normal_retirement_age within a cycle he would receive a pro_rata portion of his award mr garrett involuntarily terminated by petitioner effective date was the only retained executive who did not receive an ltip award in date all retained executives continued compensation earned in by each retained executive is summarized in the following table retained executive salary stip ltip1 payment benefit benefit allowance total retention2 srp on srp perquisites interest brink dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure denny big_number big_number big_number big_number dollar_figure dollar_figure big_number big_number francis big_number big_number big_number big_number big_number big_number big_number big_number free big_number big_number big_number big_number big_number big_number big_number big_number garrett big_number big_number big_number big_number big_number big_number big_number hite big_number big_number big_number big_number big_number big_number big_number big_number kurczewski big_number big_number big_number big_number big_number big_number big_number big_number pugh big_number big_number big_number big_number big_number big_number richardson big_number big_number big_number big_number big_number big_number big_number big_number thompson big_number big_number big_number big_number big_number big_number williams big_number big_number big_number big_number big_number big_number big_number big_number prorated portion of ltip paid in with respect to services rendered during except with respect to mr pugh whose ltip covered and only and is therefore prorated one-half to portion of the total retention payment paid in that was deducted by petitioner in that year petitioner concluded that deduction of the remainder of the retention payment paid to each retained executive except mr garrett should be deferred under sec_461 and h until economic_performance occurred in and includes dollar_figure in accrued vacation pay after receiving their retention payments in date four of the retained executives messrs francis free pugh and thompson ceased employment with petitioner before the expiration on date of the employment period provided in the employment agreements as modified by the amendments none of the four was required to repay any portion of the retention payment under the clawback clause of the amendments because their employment was not terminated by petitioner for cause or by them for other than good reason continued except mr garrett received ltip awards in date mr pugh terminated effective date received an ltip covering the years and i retained executives’ pre- and postacquisition compensation the total compensation earned by each retained executive in is summarized in the following table restricted nonqualified retained restricted_stock stock perquisite executive salary stip stock_dividend options allowance total brink dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure denny big_number big_number big_number dollar_figure big_number big_number big_number francis big_number big_number big_number big_number big_number big_number big_number free big_number big_number big_number big_number big_number big_number big_number garrett big_number big_number big_number big_number big_number big_number big_number hite big_number big_number big_number big_number big_number big_number big_number kurczewski big_number big_number big_number big_number big_number big_number big_number pugh big_number big_number big_number big_number big_number big_number big_number richardson big_number big_number big_number big_number big_number big_number big_number thompson big_number big_number big_number big_number big_number big_number big_number williams big_number big_number big_number big_number big_number big_number big_number in the retained executives received various forms of compensation under the employment agreements including stock_options restricted_stock and payments in lieu thereof as a result of provisions in the employment agreements triggered by the change in control of petitioner this compensation totaled in the aggregate for the retained executives dollar_figure in addition the retained executives received gross up payments in totaling dollar_figure designed to compensate them for any imposition on them of the sec_4999 excise_tax on parachute payments with respect to the aforementioned stock-related payments j retained executives’ duties and responsibilities the retained executives were competent in their positions had considerable management experience worked well together as a management team and were major contributors to the successful operations of petitioner under the employment agreements the retained executives had greater responsibilities duties and authority than they had under the employment agreements in the retained executives were managing a company that had undergone a leveraged_buyout and undertaken substantial debt obligations consequently they had to rapidly develop a cashflow orientation in running petitioner’s business and raise cash by selling certain assets that did not fit within petitioner’s core business of electrical equipment manufacturing the departure of mr stead petitioner’s most senior executive shortly after petitioner’s acquisition by schneider increased the pressure on the retained executives furthermore due to a recession in the united_states the retained executives were faced with the additional burden of managing a highly leveraged business in an unfavorable economic climate in addition the retained executives had to integrate petitioner’s north american and european operations with those of schneider and its other affiliates finally petitioner’s competitors began lowering their prices in an effort to take petitioner’s market share forcing petitioner to aggressively price its own products and placing an additional burden on the retained executives despite these challenges petitioner met its business plan for iv tax returns notice_of_deficiency and petition on its federal_income_tax return petitioner claimed a deduction for dollar_figure of the aggregate dollar_figure in retention payments and srp benefits paid to the retained executives in date see supra p table petitioner concluded that the dollar_figure balance of such payments should be deferred under sec_461 and h until economic_performance occurred in and in a notice_of_deficiency respondent determined that dollar_figure of the deduction claimed in should be disallowed as excess parachute payments under sec_280g on its federal_income_tax return petitioner claimed a deduction under sec_162 for the dollar_figure it paid to rogers wells for the firm’s services to banque paribas in connection with the litigation surrounding the acquisition of petitioner by schneider in the notice_of_deficiency respondent determined that this deduction should be disallowed petitioner did not claim a deduction on its return for the dollar_figure it paid to schneider as reimbursement for schneider’s payment of the loan commitment_fees in an amendment to its petition petitioner asserted entitlement to a deduction in for the foregoing amount in his answer to the amended petition respondent denied petitioner’s entitlement to the deduction i loan commitment and legal fees opinion in its amended petition petitioner asserted entitlement to a deduction in for the dollar_figure that schneider billed petitioner that year to reimburse schneider for paying the loan commitment feedollar_figure also petitioner claimed a deduction on its return for legal fees it paid to rogers wells in that year respondent disputes petitioner’s entitlement to both as a preliminary matter we note that respondent has not suggested that these costs are typical acquisition costs which must be capitalized as costs of the asset acquired see eg 503_us_79 a e staley manuf105_tc_166 revd and rem119_f3d_482 7th cir petitioner asserts that the costs at issue are loan acquisition costs which are capitalized as the cost of the loan and may be amortized over the life of the loan to which they relatedollar_figure see anover realty petitioner paid schneider’s invoice in we note that to the extent the loan commitment fee and related legal fees are treated as petitioner’s costs they might be considered stock reacquisition costs the deduction of which is generally prohibited under sec_162 however sec_162 expressly distinguishes between amounts properly allocated to indebtedness and amortized over the term of such continued corp v commissioner 33_tc_671 loan acquisition costs amortized over the life of a loan regardless of the loan’s purpose or use of funds revrul_81_160 1981_1_cb_312 dollar_figure respondent does not dispute this assertion instead respondent’s sole argument is that the loan costs at issue are schneider’s not petitioner’s and accordingly petitioner may not deduct themdollar_figure thus the question before us is whether a continued indebtedness and other stock reacquisition costs exempting the former from the prohibition on deductions sec_162 see 107_tc_187 supplementing 103_tc_345 we assume the amounts at issue would be exempted from sec_162’s restrictions in any event neither party has raised this issue revrul_81_160 1981_1_cb_312 states in pertinent part a loan commitment fee in the nature of a standby charge is an expenditure that results in the acquisition of a property right that is the right to the use of money such a loan commitment fee is similar to the cost of an option which becomes part of the cost of the property acquired upon exercise of the option therefore if the right is exercised the commitment fee becomes a cost of acquiring the loan and is to be deducted ratably over the term of the loan see revrul_75_172 1975_1_cb_145 and francis v commissioner tcmemo_1977_170 if the right is not exercised the taxpayer may be entitled to a loss deduction under sec_165 of the code when the right expires see revrul_71_191 1971_1_cb_77 petitioner asserts the loan costs in question are deductible in as opposed to amortizable over a longer period because they relate solely to the bridge loan which lasted fewer than months during respondent does not contest this assertion or otherwise suggest that the payments continued subsidiary_corporation may deduct the costs of obtaining a loan for which it is the borrower through an assumption of its merger partner’s obligations where its parent procured the loan commitment and originally committed to pay those costs petitioner makes three arguments to support its entitlement to these deductions that under the terms of the commitment letter and the bridge loan agreement petitioner as successor to acq was obligated to pay the commitment fee and the legal fees and therefore may deduct them that as the borrower of the bridge loan petitioner as successor to acq is entitled to deduct the costs associated with obtaining the loan and that even if the costs were schneider’s petitioner is entitled to deduct them because they directly benefited petitioner respondent disagrees asserting that petitioner was not legally obligated to pay the loan commitment or legal fees under the commitment letter or the bridge loan agreement and that schneider rather than petitioner benefited from the loan commitment fee as discussed more fully below we conclude that schneider incurred the costs in question on behalf of petitioner and that petitioner is entitled to deduct such costs continued should be amortized over a period that includes the life of the term_loan we shall therefore treat these payments as deductible in if they are deductible by petitioner a the legal_obligation to pay the loan costs respondent contends that the critical question concerns who is legally obligated to pay the loan acquisition costs petitioner disputes this but asserts it was so obligated thus we begin by considering whether petitioner or schneider was legally obligated to pay the commitment and legal fees in question in the case of the commitment fee owed under the commitment letter it is clear schneider alone was obligated the commitment letter obligated schneider to pay the fee up until the bridge loan was funded the commitment letter which was addressed to schneider states in relevant part your company shall pay our two banks a commitment fee of stated terms the receipt of this commitment fee shall cease upon stated circumstances barring an extension approved by our two banks and your group emphasis added we find that your company refers to schneider the addressee of the letter petitioner argues that the words your company refer to schneider and its affiliates and that the reference at the end of the paragraph to your group supports a finding that the two terms are used interchangeably however while the commitment letter does not define the term your company it does parenthetically clarify the meaning of your group as ie schneider and the subsidiaries subject_to consolidation moreover the commitment letter provides at one point your company guarantees that it will have this letter signed by merlin gerin ie mgsa telemecanique ie tesa and at another your company guarantees compliance with this provision by all the subsidiaries in which it has a controlling_interest indicating that your company does not include schneider subsidiaries finally in the section entitled groupe schneider’s commitments the commitment letter states your group agrees not to proceed to acquire new interests other than those of petitioner in net annual amounts greater than its annual consolidated available cash_flow to permit our two banks to monitor this commitment on the part of your group your company and s p e_p will provide them with all the necessary accounting data this further demonstrates your company and your group are not interchangeable terms moreover acq had not been created at the time the commitment letter was signed it was organized days later and although it is referenced as newco in the commitment letter no provision requires newco to pay the commitment fee finally although acq was created well before the commitment letter was amended to increase the loan commitment to dollar_figure5 billion on date the amendment does not obligate acq to pay the commitment fee we conclude that schneider not petitioner was obligated to pay the commitment fee due under the commitment letter when the bridge loan agreement was signed on date acq agreed to pay a commitment fee on any funds not disbursed the fee was set at the same level as the fee in the commitment letter nothing in the bridge loan agreement obligated acq to assume schneider’s obligation to pay the fee under the commitment letter nor did the bridge loan agreement expressly relieve schneider of its obligation under the commitment letter to pay a commitment fee until the funds were disbursed thus from may when the bridge loan agreement was signed until june when the bridge loan was disbursed both acq under the bridge loan agreement and schneider under the commitment letter were legally obligated to pay a commitment fee equal to percent of the undisbursed fundsdollar_figure respondent asserts he is challenging only the commitment fee incurred by schneider under the commitment letter ie the fee provided in the commitment letter covering the period from february through date thus respondent contends he is not challenging the deduction of any fees owed under the bridge loan agreement for which acq was the obligor we disagree since both schneider and acq were obligated for a commitment fee equal to percent of undisbursed funds for the the term_loan also provided for a commitment fee to be paid with respect to any undisbursed funds but none was paid because execution of the loan documents and disbursement occurred on the same day period from may to date and the dollar_figure at issue represents the fee owed from february through date the amount at issue covers periods where schneider alone was legally obligated to pay and a brief period where both schneider and acq were obligated to pay thus the commitment fee respondent has challenged includes amounts for which acq as well as schneider was obligated in the case of the legal fees the question of who was obligated to pay them is more difficult it is clear that schneider was initially obligated to pay the legal fees a letter from schneider to the french banks which was required by the commitment letter contains the following provision we herewith declare that our company agrees to indemnify your two banks as to all costs expenses or liabilities or sic any kind whatsoever arising from the bridge loan as with the commitment letter itself we find that our company refers to schneider thus schneider was initially obligated the bridge loan agreement on the other hand provides as follows there has been no suggestion that schneider and acq each owed separate percent loan commitment_fees with respect to the same undisbursed funds thus unless the banks charged no commitment fee under the bridge loan agreement or charged a separate fee that does not appear in the record the dollar_figure at issue would appear to include payments made under both the commitment letter and bridge loan agreement the borrower acq shall indemnify each bank and hold each of them harmless against any and all losses liabilities claims damages or expenses_incurred by any of them arising out of or by reason of any investigation litigation or other proceeding related to the acquisition or the borrower’s or any other party’s entering into and performance of this agreement including the reasonable fees and disbursements of counsel incurred in connection with any such investigation litigation or other proceeding although it is clear from the language presented here that acq and later petitioner as acq’s successor was obligated it is not clear whether petitioner was obligated for fees incurred by schneider before the bridge loan agreement was signed or only fees incurred from the date of the bridge loan agreement forward while it would have been clearer had the agreement specifically identified past costs the phrase related to the acquisition contains no temporal limitation sec_25 and is reasonably read to cover all costs including those costs incurred while the takeover attempt was hostile respondent has provided no evidence or argument to suggest a different reading and we accordingly find acq assumed responsibility to pay the legal costs associated with the commitment letter thus schneider was originally obligated to pay both the commitment fee and legal fees at issue schneider caused acq the bridge loan agreement defined acquisition as the acq’s acquisition of petitioner’s capital and preferred_stock pursuant to the offer of purchase dated date as supplemented and consequently petitioner to become legally obligated to pay some of the commitment fee and all of the legal fees at the same time schneider which was originally responsible for both was not absolved of its responsibility while we conclude that schneider and not petitioner bore the legal_obligation to pay most of the commitment fee and originally bore the obligation for the legal fees this is not dispositive of whether petitioner is entitled to deduct these amounts as more fully discussed below a corporation may in certain circumstances deduct expenditures incurred on its behalf by a shareholder where it makes reimbursement b reimbursed expenses as a general matter a taxpayer may not deduct payments voluntarily made on another’s behalf even where there is a moral obligation to do so williams v commissioner tcmemo_1960_ indeed this is true even where the cost would have been deductible had the taxpayer incurred it id moreover corporations generally may not deduct payments made that discharge shareholder obligations justice steel inc v commissioner tcmemo_1980_466 petitioner advances two arguments to support its contention that legal_obligation does not control under these facts first petitioner argues that the costs associated with obtaining a loan are deductible by the person who receives the loan proceeds petitioner asserts it is the borrower of the bridge loan as the successor to acq petitioner relies on revrul_81_160 1981_1_cb_312 which holds that a loan commitment fee constitutes a cost of acquiring a loan and therefore must be deducted ratably over the term of the loan revoking an earlier ruling that permitted a full deduction in the year paid the issue at hand however is who may deduct a loan commitment fee where the person who procures the loan commitment is different from albeit related to the borrower revrul_81_160 supra offers little guidance on that score petitioner’s second argument is that it should be allowed to deduct the expenses because it directly benefited from the payment thereof petitioner relies on 48_tc_679 and similar cases for this propositiondollar_figure in in all petitioner cites cases including 48_tc_679 42_tc_850 affd 349_f2d_515 1st cir 31_tc_585 27_tc_638 22_tc_430 12_tc_1109 7_tc_779 41_bta_1119 37_bta_830 35_bta_876 cepeda v commissioner tcmemo_1993_477 affd without published opinion 56_f3d_1384 5th cir coulter elecs inc v commissioner tcmemo_1990_186 affd without published opinion 943_f2d_1318 11th cir tex pac ry co v commissioner a memorandum opinion of this court dated date and shasta water co v commissioner a memorandum continued opposition respondent asserts petitioner did not benefit from the expenditures rather he asserts schneider alone benefited from the commitment and legal fees first as a factual matter petitioner did benefit from schneider’s procuring the loan commitment while acq did not exist when the commitment letter was signed it was identified in the letter as the borrower it was organized soon after and received the bridge loan proceeds as the recipient of those funds acq was clearly benefited by the banks’ commitment as was petitioner as the surviving entity after its merger with acq schneider benefited as well because the commitment to provide financing enabled it to achieve its business goal of acquiring petitioner but schneider’s benefit was not exclusive moreover while petitioner may initially have been hostile and some of the costs at issue arose because of petitioner’s hostility petitioner eventually approved the transaction petitioner stands in the shoes of acq which benefited from the loan by virtue of its receipt and use of the loan proceeds thus even though some of the loan costs may have been incurred because petitioner was initially hostile petitioner ultimately obtained and used the loan proceeds through its merger with acq continued opinion of the board_of_tax_appeals dated date more to the point however petitioner’s reliance on the lohrke line of cases and respondent’s counter argument regarding who benefited are misplaced because mere benefit is in general not dispositive regarding deductibilitydollar_figure while it is true that lohrke and like cases allow a taxpayer to deduct expenses that are the legal_obligation of another where the taxpayer benefits this exception has been construed narrowly under lohrke and similar cases it is not the character of the expense as benefiting the taxpayer that renders it deductible rather it is the circumstances surrounding the payment of the expense where the taxpayer can show that the payment of another’s expense protected or promoted its own business then such payment gives rise to a deduction under lohrke and like cases typically in these circumstances the original obligor is unable to make payment and the taxpayer satisfies the obligation to protect or promote its own interests see 115_tc_172 and cases cited therein petitioner has made no such showing here there is no suggestion that schneider respondent’s argument regarding who benefited from the loan commitment and legal fees suggests the question of whether petitioner’s payment of these costs should be considered a constructive_dividend to schneider and therefore not deductible by petitioner cf 115_tc_172 where controlling shareholder is primary beneficiary of corporate expenditure such expenditure is constructive_dividend not deductible by corporation however respondent has not raised this issue and we accordingly decline to consider it was unable to pay the loan commitment or legal fees or that petitioner’s failure to pay would have adversely affected petitioner indeed schneider remained legally obligated and it initially paid the loan commitment fee nonetheless we agree with petitioner that legal_obligation is not dispositive and conclude that the loan commitment and legal fees are deductible by petitioner because schneider incurred those costs on behalf of acq and by extension petitioner so that petitioner could obtain the bridge loan the facts and holding of 27_tc_921 are instructive the taxpayer was a corporation organized to hold and exploit certain patents it attempted to enter into a contract with a manufacturer to assemble and ship its patented products but the manufacturer refused because of the taxpayer’s poor credit rating to aid the taxpayer a major corporate shareholder who later acquired all the taxpayer’s stock becoming its parent agreed to enter into a contract directly with the manufacturer pledging its own credit on behalf of the taxpayer id pincite the manufacturer at first invoiced the shareholder but later the taxpayer for the finished products and the taxpayer made all payments on the invoices the shareholder however was never relieved of its obligations to the manufacturer under the contract a dispute arose under the contract wherein the manufacturer sought recovery_of certain production_costs the dispute was ultimately settled by the taxpayer’s transfer of property to the manufacturer the taxpayer sought to deduct the value of the property transferred to settle the dispute but the commissioner argued the amount was not deductible because the taxpayer was not legally obligated to make the transfer we rejected the commissioner’s argument stating we know of no requirement that there must be an underlying legal_obligation to make an expenditure before it can qualify as an ‘ordinary and necessary’ business_expense under sec_23 internal_revenue_code_of_1939 the basic question is whether in all the circumstances the expenditure is ordinary and appropriate to the conduct of the taxpayer's business id pincite thus it was immaterial that whatever legal_obligation might exist was the shareholder’s as opposed to the taxpayer’s the facts here are quite similar to those in waring prods corp acq was in no position to obtain a loan accordingly schneider negotiated a loan commitment and agreed to pay loan commitment and legal fees on behalf of its to-be-organized subsidiary acq after acq’s creation petitioner as the surviving entity after its merger with acq formally assumed some of the costs the legal fees which it paid directly and agreed to and did reimburse schneider for other costs the commitment fee in response to schneider’s invoice thus the costs at issue here relate to an asset--the loan--that petitioner obtained much as the expenditures in waring prods corp related to services performed for the taxpayer albeit under a contract to which the taxpayer was not a party under the circumstances of this case where the loan acquisition costs were incurred on behalf of petitioner and then paid_by petitioner it is appropriate to allow petitioner to deduct the costs it paid ii parachute payments respondent disallowed dollar_figure of the deduction claimed by petitioner in with respect to the retention payments and srp benefits paid to the retained executives in that year on the grounds that this amount constituted excess parachute payments within the meaning of sec_280gdollar_figure after concessions the parties dispute two issues underlying respondent’s determination first the parties dispute whether on brief respondent concedes that a portion of the srp benefits was not contingent on a change in control within the meaning of sec_280g on the grounds that it falls within a safe_harbor provided in sec_1_280g-1 a-24 c proposed income_tax regs fed reg date because payment of that portion was substantially certain regardless of the change in control if the retained executives continued to work for petitioner until the vesting of their rights to these payments further the parties have stipulated that the interest component of the srp benefits is deductible by petitioner under sec_163 in and does not constitute a parachute_payment within the meaning of sec_280g for convenience we hereinafter refer to the portion of the srp benefits whose deductibility remains in dispute as the disputed srp benefits and the portion conceded by respondent as deductible as the noncontingent srp benefits the retention payments and the disputed srp benefits were contingent on a change in the ownership or effective_control of petitioner within the meaning of sec_280g second the parties disagree about the extent to which petitioner has established that the foregoing amounts constitute reasonable_compensation within the meaning of sec_280g a general requirements of sec_280g in general terms sec_280g disallows a deduction for any payment in the nature of compensation to certain individuals performing services for a corporation i if the payment is contingent on a change in ownership or control of the corporation ii if and to the extent the payment exceeds three times the individual’s annual compensation in periods preceding the change in control and iii if and to the extent the payment has not been shown by the taxpayer to constitute reasonable_compensation for services rendered before or after the change in ownership or control more specifically sec_280g disallows a deduction for any excess_parachute_payment defined in sec_280g as an amount equal to the excess of any parachute_payment over the portion of the base_amount allocated to such payment p arachute payment as relevant to the instant case is defined in sec_280g as follows a in general --the term parachute_payment means any payment in the nature of compensation to or for the benefit of a disqualified_individual if-- i such payment is contingent on a change-- i in the ownership or effective_control of the corporation or ii in the ownership of a substantial portion of the assets of the corporation and ii the aggregate present_value of the payments in the nature of compensation to or for the benefit of such individual which are contingent on such change equals or exceeds an amount equal to times the base_amount for purposes of clause ii payments not treated as parachute payments under paragraph a ie sec_280g regarding reasonable_compensation set out below shall not be taken into account as provided in the foregoing flush language the amount treated as a parachute_payment and therefore also an excess_parachute_payment does not include the portion of a contingent-on- control-change payment that the taxpayer proves is reasonable_compensation as provided in sec_280g treatment of amounts which taxpayer establishes as reasonable_compensation --in the case of any payment described in paragraph a ie sec_280g set out above -- a the amount treated as a parachute_payment shall not include the portion of such payment which the taxpayer establishes by clear_and_convincing evidence is reasonable_compensation for personal services to be rendered on or after the date of the change described in paragraph a i the parties agree that the retention payments and srp benefits that petitioner deducted and respondent disallowed were in the nature of compensation to disqualified individuals within the meaning of sec_280g the parties also agree as to the base_amount under sec_280g for each retained executive the parties disagree and we must decide whether the retention payments and the disputed srp benefits were contingent on a change in ownership or control within the meaning of sec_280g and if so whether any portion of such payments constituted reasonable_compensation for personal services rendered after29 the change in control within the meaning of sec_280g b whether payments were contingent on a change in control respondent contends that the retention payments and the disputed srp benefits were contingent on a change in petitioner’s ownership or control within the meaning of the statute petitioner contends that the payments in question were not so contingent because they were made pursuant to an agreement the statute also provides that the amount treated as an excess_parachute_payment shall be reduced by the amount demonstrated to be reasonable_compensation for personal services actually rendered before the change in ownership or control sec_280g however petitioner does not contend that this provision applies in the instant case entered into after the change in control for the reasons outlined below we agree with respondent the phrase contingent on a change in the ownership or effective_control of the corporation as used in sec_280g is not further defined in the statute however the legislative_history of that section provides that a payment is to be treated as contingent on a change_of_ownership or control if such payment would not in fact have been made to the disqualified_individual had no change in ownership or control occurred h rept pincite 1984_3_cb_1 see also 34_f3d_480 7th cir adopting foregoing standard affg 100_tc_331 furthermore the general explanation of the revenue provisions of the deficit_reduction_act_of_1984 states that a payment generally is to be treated as one which would not have in fact been made unless it is substantially certain at the time of the change that the payment would have been made whether or not the change occurred staff of joint comm on taxation general explanation of the revenue provisions of the deficit_reduction_act_of_1984 pincite j comm print in this regard a payment may be treated as contingent on a change in ownership or control even if the employment of the disqualified_individual receiving the payment is not voluntarily or involuntarily terminated see h rept supra pincite c b vol pincite in the commissioner issued proposed_regulations under sec_280g in question and answer q a formatdollar_figure see sec_1_280g-1 proposed income_tax regs fed reg date as corrected by fed reg date and fed reg date hereinafter proposed_regulations q a-22 of the proposed_regulations defines contingent on a change in the ownership or effective_control in a manner consistent with the legislative_history in general a payment is treated as contingent on a change in ownership or control if the payment would not in fact have been made had no change in ownership or control occurred a payment generally is to be treated as one which would not in fact have been made in the absence of a change in ownership or control unless it is substantially certain at the time of the change that the payment would have been made whether or not the change occurred the commissioner issued revised proposed_regulations on date and final regulations under sec_280g on date see sec_1_280g-1 proposed income_tax regs fed reg date sec_1_280g-1 income_tax regs these regulations are not applicable here because they apply to payments contingent on a change in ownership or control that occurs on or after date see sec_1_280g-1 q a-48 proposed income_tax regs fed reg date sec_1_280g-1 q a-48 income_tax regs where as here the change in ownership or control occurred prior to date the commissioner has conceded that taxpayers may rely on the proposed_regulations see preamble to sec_1_280g-1 income_tax regs fed reg date see also preamble to sec_1_280g-1 proposed income_tax regs fed reg date sec_1_280g-1 a-22 a proposed income_tax regs fed reg date the next q a clarifies this rule with respect to payments made under agreements entered after a change in control q a-23 of the proposed_regulations states q-23 may a payment be treated as contingent on a change in ownership or control if the payment is made under an agreement entered into after the change a-23 a no payments are not treated as contingent on a change in ownership or control if they are made or to be made pursuant to an agreement entered into after the change for this purpose an agreement that is executed after a change in ownership or control pursuant to a legally enforceable agreement that was entered into before the change will be considered to have been entered into before the change sec_1_280g-1 q a-23 proposed income_tax regs fed reg date emphasis added both petitioner and respondent have framed the contingent on control change issue as turning upon the precise meaning of the phrase pursuant to in q a-23 of the proposed regulationsdollar_figure while proposed_regulations are not competent_authority and carry no more weight than a position advanced on brief by the we note that the revised proposed and final regulations under sec_280g see supra note modified q a-23 to provide that where a taxpayer gives up rights under an agreement entered into before a change in control as consideration for rights under a new agreement entered into after a change in control the payments under the post-change agreement will be considered contingent on a change in control to the extent payments under the post-change agreement have the same value as those due under the pre-change agreement see sec_1_280g-1 q a-23 proposed income_tax regs fed reg date sec_1 280g- q a-23 income_tax regs respondent 54_tc_1233 see also 92_tc_1331 affd 922_f2d_283 5th cir 87_tc_759 ndollar_figure 70_tc_448 respondent has conceded that petitioner may rely on these proposed_regulations with respect to a change in ownership or control that occurs prior to date see preamble to sec_1_280g-1 sec_68 fed reg date see also preamble to sec_1_280g-1 proposed income_tax regs fed reg date even though petitioner is entitled to rely on the version of q a- contained in the proposed_regulations that version does not support petitioner’s position in an effort to bring the payments at issue within the exception in q a-23 to treatment as contingent on a change in control petitioner offers considerable argument in support of the claim that the retention payments and disputed srp benefits were made pursuant to the employment agreements as amended in rather than the employment agreements this is not the issue however no one seriously disputes that the payments in question where made pursuant to the employment agreements as amended in the dispute concerns whether the employment agreements were executed pursuant to the employment agreements to the extent we can interpret petitioner as addressing the latter point petitioner seems to suggest that a pre-control-change agreement must have imposed a legal_obligation on or there must have existed at least an informal pre-control-change understanding requiring the parties to enter into the post-control-change agreement under which the payments are made in order for such payments to be treated as contingent on a change in control within the meaning of sec_280g as petitioner observes on brief in the instant case neither petitioner nor the executives were under any legal_obligation to enter into the employment agreements or the amendments citations omitted they could have gone in separate directions from the legal standpoint thus the payments necessarily were made pursuant to the new ie and agreements and were not contingent on a change in control of petitioner i n the instant case there was no formal or informal pre-acquisition understanding that the parties would enter into the employment agreements or the amendments and that the retention payments and srp benefits would be made under those agreements respondent interprets pursuant to as used in q a-23's reference to the relationship between pre- and post-control- change agreements in the sense of the earlier agreement’s functioning as a proximate cause of certain terms of the later agreement thus if a legally enforceable pre-control-change agreement is the proximate cause of provisions in an agreement entered into after the change in control the latter agreement is treated as executed pursuant to the former within the meaning of the proposed_regulations as a consequence under the proposed_regulations the latter agreement is considered to have been entered into before the change sec_1_280g-1 a-23 proposed income_tax regs supra respondent’s argument is that the retained executives were able to obtain key terms of the employment agreements--which entitled each to a retention payment and a srp benefit calculated to exceed the value of his termination award and srp cashout--because of the employment agreements which in the event of a change in control entitled each retained executive to a termination award and srp cashout at his sole discretion the retained executives’ entitlement to the termination awards and srp cashouts under the employment agreements thus gave them a significant degree of leverage in their negotiations with schneider over the employment agreements respondent argues in respondent’s view the employment agreements were executed pursuant to the employment agreements within the meaning of prop sec_1_280g-1 q a-23 because the terms of the post-acquisition agreements were dictated by the parachute provisions of the pre- acquisition agreements we conclude that respondent’s construction of pursuant to is consistent with the meaning of contingent on a change in the ownership or effective_control of the corporation used in sec_280g as that meaning has been clarified in the legislative_history of the statute petitioner’s construction by contrast would contravene the meaning intended by congress as noted the legislative_history provides that a payment is to be deemed contingent on a change in control if the payment would not in fact have been made to the disqualified_individual had no change in ownership or control occurred h rept supra pincite c b vol pincite in sum congress intended a factual but for test respondent’s construction of pursuant to which interprets it as conveying a factual causal nexus rather than legal or contractual necessity accords with the legislative_history petitioner’s construction which would find the pursuant to relationship to exist between pre- and post-control-change agreements only where the former legally required the latter produces a far narrower construction of contingent on a change in control than congress intended we therefore reject it thus sec_1_280g-1 a-23 proposed income_tax regs supra is no help to petitioner absent sec_1_280g-1 q a-23 proposed income_tax regs supra we think respondent easily prevails in his claim that the retention payments and the disputed srp benefits were contingent on a change in control within the meaning of sec_280g both this court and the court_of_appeals for the seventh circuit to which appeal of this case would ordinarily lie have endorsed the previously quoted legislative history’s gloss on the meaning of contingent on a change in control as used in the statute see 34_f3d_480 7th cir in cline the taxpayer entered into a severance agreement that would have subjected the taxpayer to an excise_tax for parachute payments under sec_4999 and his employer to a deduction disallowance under sec_280g to avoid this result the taxpayer and his employer renegotiated the agreement to reduce the severance payment below the threshold level the employer then agreed to use its best efforts to employ the taxpayer so as to make up the amount subtracted from the original agreement in the end the taxpayer received a bonus almost equivalent to the reduction in the parachute_payment the seventh circuit affirmed this court which found that the later payment negotiated after the change in control was properly considered as contingent on a change_of control cline v commissioner supra pincite on this record we have no difficulty concluding that the retention payments and the disputed srp benefits would not in fact have been made had no change in ownership or control occurred h rept supra pincite c b vol pincite the facts in this case are that schneider had no feasible alternative to retaining the retained executives in order to protect its dollar_figure billion investment in petitioner that the retained executives were aware of schneider’s plight and that the retained executives used their entitlement to the termination awards and srp cashouts as a sword in their negotiations with schneider concerning the terms of their compensation_for continued employment as one retained executive expressed it in a letter to a negotiator for schneider one way or the other the parachute payments will be paid and not one officer is willing to give up what they are entitled to under their employment contract schneider ultimately agreed to retention payments and srp benefits that exceeded the termination awards and srp cashouts payable under the employment agreements if the retained executives had elected to terminate their employment during the date window indeed as reflected in our findings_of_fact the retention payment payable to each retained executive if his employment terminated other than for cause on the first day the employment agreements became effective-- that is without his providing any services--exceeded the termination award to which the executive was entitled if he unilaterally terminated his employment during the date window under the employment agreements the role of the srp benefit in replacing the srp cashout provided in the employment agreements is similarly transparent the srp benefit was in general computed as an amount equal to the srp cashout under the employment agreements for a termination as of date plus interest to the date paid in sum the circumstances surrounding the negotiations that secured the retained executives’ rights to the retention payments and srp benefits under the employment agreements and the relationship between these payments and the termination awards and srp cashouts under the employment agreements convince us and we so find that the retention payments and srp benefits were obtained by the retained executives as consideration in exchange for relinquishing their rights to the termination awards and srp cashoutsdollar_figure since the latter payments were indisputably contingent on a change in control and they were relinquished in exchange for the retention payments and srp benefits we are persuaded that the retention payments and the disputed srp benefits would not in fact have been made absent the change in ownership accordingly we hold that the although it is true that a retained executive’s right to receive a termination award was essentially unconditional during the date window while his right to a retention payment was conditioned upon either i involuntary termination without cause ii voluntary termination for good reason or iii completion of an approximately 3-year employment period we believe that a retained executive was compensated for the assumption of these new restrictions by the amount by which the retention payment exceeded the termination award specifically the retention payment payable to each retained executive on the first day the employment agreement was effective exceeded his termination award and the retention payment increased pro_rata for each week of employment after the effective date of the employment agreement retention payments and the disputed srp benefits were contingent on a change in ownership or effective_control within the meaning of sec_280g concededly the retention payments and disputed srp benefits also served in part as consideration for future services as the retained executives were generally required to serve out a 3-year later amended to 4-year term of employment to receive them unless terminated for cause or good reason however the statute contemplates situations where such contingent payments that fall within the definition of parachute_payment may also serve as consideration for future services and provides a mechanism for exempting amounts from parachute_payment treatment that the taxpayer can show are serving the latter function namely by proving that they are reasonable_compensation for services rendered or to be rendered see sec_280g the parties dispute whether the amounts determined by respondent to be contingent on a change in control constitute reasonable_compensation within the meaning of sec_280 and it is to that dispute that we now turn c reasonable compensation--applicable test since the retention payments and the disputed srp benefits were contingent on a change in control they are parachute payments for purposes of sec_280g except to the extent that petitioner can establish by clear_and_convincing evidence that any portion of those payments constituted reasonable_compensation for services to be rendered on or after the change in ownership or controldollar_figure respondent does not contest the deductibility as reasonable_compensation of any other_payments received by the retained executives in in deciding whether petitioner has shown that any portion of the payments at issue constituted reasonable_compensation for purposes of sec_280g we are faced with the threshold question of the appropriate test or standard to use for assessing the reasonableness of compensation in 34_f3d_480 7th cir the court_of_appeals for the seventh circuit to which an appeal in this case would ordinarily lie approved our use of a multifactor test as a means of determining whether compensation is reasonable for purposes of sec_280g more recently however the court_of_appeals rejected the use of a multifactor test to determine reasonable_compensation for purposes of sec_162 holding that an independent sec_280g provides in part treatment of amounts which taxpayer establishes as reasonable_compensation --in the case of any payment described in paragraph a -- a the amount treated as a parachute_payment shall not include the portion of such payment which the taxpayer establishes by clear_and_convincing evidence is reasonable_compensation for personal services to be rendered on or after the date of the change described in paragraph a i investor test must instead be useddollar_figure 196_f3d_833 7th cir revg heitz v commissioner tcmemo_1998_220 as exacto spring corp concerned reasonable_compensation for purposes of sec_162 it is distinguishable from the instant case and therefore we are not bound by 54_tc_742 affd 445_f2d_985 10th cir to follow it here nonetheless the disfavor with which the court_of_appeals views the traditional multifactor test for reasonable_compensation prompts us to consider carefully whether it is appropriate to extend the independent_investor_test of exacto in 196_f3d_833 7th cir revg heitz v commissioner tcmemo_1998_220 the court_of_appeals for the seventh circuit rejected a multifactor test for reasonable_compensation in a sec_162 context which examined such factors as the employee’s skills and duties prior earning capacity the prevailing compensation paid to employees with comparable jobs etc because inter alia the factors conventionally used in a multifactor test do not bear a clear relation to the primary purpose of sec_162 which is to prevent dividends or in some cases gifts which are not deductible from corporate income from being disguised as salary which is id pincite the court_of_appeals held instead that the independent_investor_test which dissolves the old multifactor test and returns the inquiry to basics id pincite must be used the independent_investor_test as fashioned by the court_of_appeals for the seventh circuit looks solely at the rate of return that has been generated for the corporation’s owners by its managers ie its high-level employees whose compensation is at issue if the rate of return after compensating the managers is one that would according to expert opinion be acceptable to an independent investor considering the risks of the investment then the managers’ compensation is presumptively reasonable id pincite spring corp to circumstances where reasonable_compensation must be measured for purposes of sec_280g we do not do so because we conclude that use of the independent_investor_test to determine reasonable_compensation for purposes of sec_280g would contravene congressional intent reasonable_compensation as that term is used in sec_280g is not further defined in the statute neither the committee nor conference reports accompanying the enactment of original sec_280g in the deficit_reduction_act_of_1984 publaw_98_369 98_stat_494 provide any guidance regarding how reasonable_compensation as employed in sec_280g is to be determined however the joint_committee on taxation’s general explanation covering the legislation states in the case of an employment contract whether payments under it would be deemed reasonable would depend on all the facts and circumstances including the individual’s historic compensation the duties to be performed under the contract and the compensation of individuals of comparable skills outside of an acquisition context staff of joint comm on taxation general explanation of the revenue provisions of the deficit_reduction_act_of_1984 pincite j comm print an amendment to the statute years after sec_280g was enacted contains direct legislative_history concerning the intent underlying reasonable_compensation in congress amended sec_280g to provide in cases where the taxpayer establishes that a parachute_payment constitutes reasonable_compensation for different treatment where the reasonable_compensation is for services provided before or after the date of the change in ownership or control see tax_reform_act_of_1986 publaw_99_514 sec j 100_stat_2808 in connection with this amendment of the reasonable_compensation provisions of sec_280g the finance_committee report states the committee intends that evidence that amounts paid to a disqualified_individual for services to be rendered that are not significantly greater than amounts of compensation other than compensation contingent on a change in ownership or control or termination of employment paid to the disqualified_individual in prior years or customarily paid to similarly situated employees by the employer or by comparable employers will normally serve as clear_and_convincing evidence of reasonable_compensation for such services s rept pincite 1986_3_cb_1 see also h rept pincite 1986_3_cb_1 containing substantially identical language the foregoing legislative_history convinces us that congress intended that reasonable_compensation for purposes of sec_280g was generally to be determined under the conventional multifactor test the factors enumerated in the finance_committee report--that is the employee’s compensation in prior years and the compensation paid to similarly situated employees of the taxpayer or of comparable employers--are archetypal factors of the conventional multifactor testdollar_figure we accordingly similar factors are also included in q a-40 of the proposed revised proposed and final regulations sec_1 280g- proposed income_tax regs fed reg date as corrected by fed reg date and further continued conclude that extension of the court_of_appeals for the seventh circuit’s independent_investor_test for determining reasonable_compensation under sec_162 to the golden parachute context would be contrary to congressional intent our conclusion is buttressed by consideration of the differing purposes served by sec_162 and sec_280g as pointed out by the court_of_appeals in exacto spring corp sec_162 is designed to address the problem created by a closely held corporation’s controlling shareholder-employee’s incentive to mischaracterize a nondeductible dividend as deductible compensation_for services the independent_investor_test addresses this abuse by testing the claimed compensation against the result that market forces would produce that is the compensation that an independent investor not affected by the tax incentives operating on an investor-employee would be willing to pay a corporate manager producing a given rate of return in enacting sec_280g congress set out to address a different problem the deleterious effect in congress’s view of golden parachute contracts on the acquisition process for publicly traded corporations because such arrangement sec_35 continued corrected by fed reg date sec_1_280g-1 proposed income_tax regs fed reg date sec_1_280g-1 income_tax regs discouraged would-be acquirers created conflicts of interest between the managers and shareholders of such corporations and tended to reduce the share of the acquisition proceeds that should go to the seller’s shareholders staff of joint comm on taxation general explanation of the revenue provisions of the deficit_reduction_act_of_1984 pincite j comm print in this context congress concluded that golden_parachutes should be strongly discouraged by exacting a tax penalty if they are paid s prt vol pincite the purpose of sec_280g then is to impose a tax penalty on a corporation that pays golden_parachutes defined generally as payments that are extraordinarily large in relation to the recipient’s historical compensation and are contingent on a change in control of the corporate payor moreover the statute provides that such payments are presumptively unreasonable_compensation we do not believe that an independent_investor_test for reasonable_compensation is well designed to accomplish congress’s goal since it asks only whether an independent investor would have been satisfied with his return after payment of the parachute payments plus any other compensation to management presumably when golden_parachutes are present an acquisition goes forward because the acquirer-- who is an actual not merely hypothetical independent investor-- believes that his rate of return after paying the golden_parachutes will be satisfactory otherwise the acquirer would not proceed with the transactiondollar_figure thus it would appear that in any case where an acquisition of a publicly traded corporation has been consummated triggering the payment of golden_parachutes contingent thereon the amounts so paid at least where connected to services would tend to be found reasonable_compensation under an independent_investor_test accordingly applying the independent_investor_test to segregate reasonable from unreasonable_compensation in the acquisition context may not produce results that are meaningful in light of the intent of sec_280gdollar_figure instead we believe the touchstone of reasonable_compensation that congress intended for sec_280g is as phrased in the legislative_history the amount that would be paid outside of an acquisition context staff of joint comm on a would-be acquirer will typically have knowledge of the existence of golden parachute contracts as did schneider in this case because such compensation arrangements are generally required to be disclosed in a publicly traded corporation’s proxy statements filed with the securities_and_exchange_commission see c f_r sec b v a one can imagine other situations where reasonable_compensation must be determined yet an independent_investor_test may not be readily applied for example the payment of unreasonable_compensation to an employee of a sec_501 organization may constitute private_inurement in violation of that section see eg 72_tc_681 however the concept of an appropriate return on investment would appear inapposite in the case of a nonprofit enterprise taxation general explanation of the revenue provisions of the deficit_reduction_act_of_1984 pincite j comm print the independent_investor_test takes no account of the existence or absence of an acquisition context the conventional multifactor test which considers inter alia historical preacquisition compensation as well as compensation paid_by comparable companies that have not been recently acquired is better designed to identify the amount of compensation that would have been paid outside an acquisition context and it is this amount that we conclude congress intended to treat as reasonable_compensation for purposes of sec_280gdollar_figure even if the independent_investor_test were applied in this case petitioner has failed to demonstrate by clear_and_convincing evidence that its after-tax return on equity in would have been satisfactory to a hypothetical independent investor based on its audited financial statements petitioner’s after-tax return on equity for was negative after making a series of adjustments that purportedly eliminate the effects of its acquisition and associated indebtedness petitioner contends that its return on equity was more than percent in we need not decide whether petitioner has demonstrated clearly and convincingly that these adjustments are appropriate because in any event petitioner has failed to demonstrate what the rates of return for comparable companies would be if similar adjustments were made to their earnings and stockholders’ equity accordingly even if an independent_investor_test were applicable petitioner has not shown that the compensation paid to the retained executives was reasonable thereunder d determination of reasonable_compensation overview of expert testimony having decided to apply a multifactor test we turn to a consideration of whether petitioner has met its burden of showing by clear_and_convincing evidence that the retention payments and disputed srp benefits constitute reasonable_compensation both parties presented expert testimony on the reasonableness of the retained executives’ compensation under the employment agreements as amended in dollar_figure petitioner’s expert pearl meyer is an executive compensation consultant with more than years’ experience respondent’s expert arthur rosenbloom is a financial consultant and investment banker specializing in securities valuation and mergers and acquisitions with more than years’ experience both ms meyer and mr rosenbloom authored opening and rebuttal expert reports and testified at trial petitioner also argues that the compensation of the retained executives under the employment agreements was reasonable because it was the product of arm’s-length bargaining the short answer to petitioner’s argument is that while the negotiations may have been at arm’s length they were indisputably skewed by the retained executives’ right to collect their substantial termination awards and srp cashouts in date without providing any future services thus as reflected in our findings a significant portion of the retention payments and srp benefits served to compensate the retained executives for the relinquishment of their rights to the termination awards and srp cashouts not for their future services consequently the arm’s-length nature of the bargaining provides no assurance that the amounts paid were arm’s-length consideration for the services to be rendered we evaluate the opinions of experts in light of the qualifications of each expert and all other evidence in the record 480_f2d_171 9th cir affg 54_tc_493 86_tc_547 we have broad discretion to evaluate ‘the overall cogency of each expert’s analysis ’ 838_f2d_330 9th cir quoting 783_f2d_906 9th cir affg in part revg and remanding in part t c memo affg in part revg in part tcmemo_1986_318 we are not bound by the opinion of an expert when that opinion is contrary to our judgment 813_f2d_837 7th cir affg 85_tc_56 227_f2d_753 6th cir affg tcmemo_1954_139 while we may accept the opinion of an expert in its entirety 74_tc_441 we may be selective in the use of any portion of such an opinion parker v commissioner supra pincite both experts considered numerous factors including the skills and responsibilities of each retained executive before and after the merger and the compensation of purportedly comparable executives of other companies mr rosenbloom conducted an analysis of compensation paid_by petitioner to the retained executives before and after the acquisition by schneider as well as a comparison of the retained executives’ compensation paid in with compensation paid in to executives of other companies ms meyer conducted what she termed an internal analysis focusing on aspects of petitioner’s financial condition and need for skilled executives and three external analyses which measured the retained executives’ compensation packages against those of executives working at other companies we conclude that two of ms meyer’s external analyses fall considerably short of providing clear_and_convincing evidence of the reasonableness of the compensation of the retained executives in one such analysis employs data from executive compensation surveys prepared by towers perrin watson wyatt data services and william m mercer inc as described in ms meyer’s opening report these surveys include compensation data from anywhere from to big_number organizations many of which are conceded to be outside the electrical equipment industry we reject this analysis because it employs data from companies that have not been shown to be comparable to petitioner although sec_280g itself does not address the use of comparable companies and their executives as a basis for determining reasonable_compensation the legislative_history of the amendment of sec_280g specifically endorses the use of similarly situated employees working for comparable employers as a means of determining reasonable_compensation s rept supra pincite c b vol pincite h rept supra pincite c b vol pincite in our view if the designation of comparable employers is to have meaningful content it must be more restrictive than data sources for these surveys which include an many as big_number organizations in a second external analysis ms meyer examined compensation arrangements between i companies engaged in the electrical equipment or substantially_similar industries and ii executives of those companies focusing on compensation paid to executives for purposes of recruitment promotion or retention however of the arrangements examined by ms meyer only one involved calendar_year consequently the relevance of ms meyer’s findings under this approach to the ascertainment of reasonable_compensation in has not been clearly established and we reject them a third external analysis performed by ms meyer is more promising in it she utilized publicly available disclosures of executive compensation contained in proxy statements filed by publicly traded companies with the securities_and_exchange_commission sec to compare the compensation of purportedly comparable executives to the compensation of the retained executives mr rosenbloom used a similar approach based on sec proxy materials these comparisons based on sec proxy materials constitute a principal basis for each expert’s opinion regarding the reasonableness of the retained executives’ compensation we shall consider the experts’ differences in more detail hereinafter historical compensation as noted mr rosenbloom also performed an analysis of the retained executives’ compensation before and after the acquisition by schneider notably absent from ms meyer’s opening report is any serious consideration of the retained executives’ historical compensationdollar_figure the legislative_history of sec_280g makes clear that one factor to be considered in determining reasonable_compensation for purposes of sec_280g is compensation paid to the disqualified ms meyer addressed historical compensation only in her rebuttal report by way of criticizing mr rosenbloom’s analysis in connection therewith ms meyer reached the conclusion that the appropriate historical comparison should be between the compensation paid to all of petitioner’s senior executives prior to the acquisition and the compensation paid to all such executives after the acquisition in ms meyer’s computations the increase in these two figures was only percent between and which she found unremarkable in reaching this figure however ms meyer omitted entirely the retention payments and srp benefits paid to the retained executives in notwithstanding the fact that petitioner has stipulated that a substantial portion of the former and all of the latter were earned by the retained executives in that year moreover as discussed more fully hereinafter we reject the notion that compensation payments of this magnitude can be ignored in measuring the reasonableness of the retained executives’ compensation in accordingly we accord no weight to ms meyer’s attempt at an historical analysis of the retained executives’ compensation individual in prior ie to the change in control years s rept supra pincite c b vol pincite h rept supra pincite c b vol pincite mr rosenbloom analyzed the increases in the retained executives’ compensation from to and concluded that the increases ranged from to percent ms meyer faulted several aspects of mr rosenbloom’s methodology including his treatment of stock_options restricted_stock perquisites and ltip payouts aside from the ltip payouts the parties entered stipulations apparently subsequent to the drafting of the expert reports that establish the amounts of the foregoing compensatory payments that were earned in and on the basis of the compensation which it has been stipulated the retained executives earned a comparison of and compensation is possible and the results are comparable to mr rosenbloom’sdollar_figure without treating any portion of the ltip payout as earned in notwithstanding that the payout was determined with respect to services in and the retained executives’ mr rosenbloom’s computation of the increase from to is conservative in one important respect because he includes in compensation only percent of the retention payments and srp benefits paid to the retained executives in that year the parties have stipulated that a substantially larger portion of the retention payments and all of the srp benefits were earned by the retained executives in when the stipulated amounts are added to compensation the increase over is augmented to that extent and compensation and the percentage increase therein is as follows retained percentage executive compensation compensation increase brink denny francis free garrett hite kurczewski pugh richardson thompson williams dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number if the retained executives are treated as having earned one-third of their ltip payout in which we elsewhere conclude is appropriate when measuring reasonable_compensation for purposes of sec_280g the percentage increase in their compensation from to is as follows retained executive percentage compensation compensation1 increase brink denny francis free garrett hite kurczewski pugh richardson thompson williams dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number 3big_number big_number big_number big_number include sec_1 of ltip payout mr garrett did not receive an ltip payout include sec_1 of ltip payout in developing a comparison of pre- and postacquisition compensation we believe that is the most appropriate measure of preacquisition compensation because in the retained executives received dollar_figure in compensation that was triggered by the acquisitiondollar_figure thus compensation does not reflect preacquisition levels of compensation the dramatic increase between the preacquisition compensation and postacquisition compensation of the retained executives provides support for the conclusion that the retention payments and srp benefits earned in were not reasonable_compensation for purposes of sec_280g petitioner ha sec_42 this figure consists of dollar_figure in stock-related payments under the employment agreements plus dollar_figure in gross up payments to compensate the retained executives for nondeductible excise_taxes they incurred as a result of their receipt of the stock-related payments not shown that any comparable executives outside an acquisition context received similar increases in their compensation over this period analysis of comparables as noted previously the two experts’ use of compensation of purportedly comparable executives disclosed in sec proxy filings to test the reasonableness of the retained executives’ compensation was a principal basis for their conclusions and of ms meyer’s various external analyses the only one we have not rejected however the approach used by ms meyer raises two threshold methodological issues that must be resolved a relevant period for reasonable_compensation comparison in developing her comparables analysis ms meyer generally considered compensation data for the aggregate period of through in her opening report in her rebuttal report she considered data for only mr rosenbloom generally considered such data for only ms meyer’s use of 4-year aggregate figures in her analysis presents a threshold methodological issue ms meyer and petitioner on brief take the position that the reasonableness of the retained executives’ compensation under the employment agreements as amended should be assessed on the basis of the total compensation paid to the retained executives over the approximately 4-year period covered by the agreements ie late through as compared to the total compensation paid to comparable executives over a similar period in the view of petitioner and ms meyer this aggregate approach is appropriate because the retention payments covered approximately years of services thus the retention payments should be combined with the other compensation earned by the retained executives for these years of services eg salary stip ltip and the resulting 4-year total compared to the 4-year total compensation earned by comparable executives to determine reasonableness we disagree sec_280g provides that a parachute_payment shall not include the portion of such payment which the taxpayer establishes by clear_and_convincing evidence is reasonable_compensation for personal services to be rendered on or after the date of the change in control sec_280g while the statute is broad enough to encompass a contingent-on- control-change payment made for services spanning more than one taxable_year we believe that proof by clear_and_convincing evidence requires a taxpayer to demonstrate the reasonableness of we note that the retention payments paid in date were subject_to a clawback provision if a retained executive failed to serve out the 4-year term of his employment agreement as amended however the srp benefits paid in date were not subject_to any similar forfeiture the compensation paid with respect to the services rendered in a given taxable_year in date petitioner paid retention payments and srp benefits to the retained executives totaling dollar_figure of this amount petitioner deducted dollar_figure-- consisting of the total44 of the srp benefits payments and related interest_paid to the retained executives in dollar_figure plus that portion of the aggregate retention payments paid in with respect to which petitioner took the position that economic_performance within the meaning of sec_461 had occurred in dollar_figure dollar_figure the remaining dollar_figure in retention payments paid in was deferred according to petitioner pursuant to sec_461 and deducted ratably in petitioner’s and taxable years having thus taken the position that dollar_figure in retention payments and srp benefits was earned by the retained executives in it is incumbent upon petitioner in our view to demonstrate clearly and convincingly that these amounts when petitioner contends that the entire srp benefits payment plus interest was deductible when paid in because unlike the retention payments such amount was not subject_to clawback petitioner has also stipulated that the amount of the retention payments and srp benefits that was earned by the retained executives in was dollar_figure added to the other compensation earned by the retained executives in that year constituted reasonable_compensation for the services rendered in dollar_figure ms meyer’s opening report which compares the retained executives’ total compensation47 including retention payments over the period with the total compensation over the same period earned by comparable executives fails to demonstrate what amount of compensation was reasonable for the services rendered in ms meyer’s 4-year aggregate approach effectively treats the retention payments and srp benefits as having been earned ratably over years when in fact they were lump-sum payments totaling dollar_figure made in more than percent of which petitioner treated in its return as earned by the retained executives in nothing the parties generally disregard the fact that some portion of the retention payments is theoretically allocable to the days in covered by the employment agreements as we do not consider this allocation material we shall likewise disregard it ms meyer excludes from the retained executives’ compensation any portion of the srp benefits that was paid to them in date as more fully discussed infra we do not agree that such amounts are appropriately excluded from compensation moreover we believe ms meyer’s treatment of the srp benefits conflicts with petitioner’s stipulation that they were earned in more precisely ms meyer did not treat the srp benefits as having been earned ratably over the period instead she took the position that the payment of the srp benefits in should be disregarded in determining whether the challenged payments to the retained executives constituted reasonable_compensation see supra note in ms meyer’s opening report suggests how much compensation of the total amount calculated as reasonable for the period was reasonable for the services rendered in accordingly the 4-year aggregate approach utilized by ms meyer and urged by petitioner is not persuasive in showing that the retention payments and disputed srp benefits that petitioner treated as earned in constituted reasonable_compensation for services rendered in that year--certainly not where petitioner has the burden of demonstrating the foregoing by clear_and_convincing evidence perhaps sensing the flaw in her 4-year aggregate approach ms meyer in her rebuttal report confined her analysis to alone because we reject the 4-year aggregate approach we draw heavily on ms meyer’s rebuttal report in evaluating her opinions in this case b aggregate versus individual compensation a second threshold methodological dispute concerns whether the reasonableness of compensation_for purposes of sec_280g may be assessed on the basis of the retained executives as a group or individually ms meyer and petitioner take the position that the reasonableness of the retained executives’ compensation need only be demonstrated in the aggregate that is so long as the total aggregate compensation of the retained executives is reasonable in comparison to the total compensation of a comparable group of executives it should be treated as reasonable for purposes of sec_280g even though the individual compensation of certain retained executives was unreasonabledollar_figure we conclude that petitioner’s and ms meyer’s position is unsupportable as a matter of law first the legislative_history of sec_280g indicates that congress contemplated that the test for reasonableness of compensation would be applied on an individual basis the committee intends that evidence that amounts paid to a disqualified_individual for services to be rendered that are not significantly greater than amounts of compensation paid to the disqualified_individual in prior years will normally serve as clear_and_convincing evidence of reasonable_compensation for such services s rept supra pincite c b vol pincite see also h rept supra pincite c b vol pincite containing substantially identical language emphasis added moreover the finance committee’s description of the test comports with longstanding caselaw requiring the determination of reasonable_compensation for purposes of sec_162 on an individual rather than group basis see eg hendricks furniture inc v commissioner tcmemo_1988_133 rts inv in her opening report ms meyer’s comparisons demonstrated that on an individual basis four of the retained executives received unreasonable_compensation but she disregarded this result in light of her view that the aggregate compensation of the retained executives as a group was demonstrated as reasonable corp v commissioner tcmemo_1987_98 affd 877_f2d_647 8th cir affd without published opinion sub nom hilt v commissioner 899_f2d_1225 9th cir schanchrist foods inc v commissioner tcmemo_1977_129 william e davis sons inc v commissioner tcmemo_1975_229 natl underwriters inc v commissioner tcmemo_1974_14 the legislative_history and the authorities under sec_162 persuade us that reasonable_compensation for purposes of sec_280g should be determined on an individual basis the analyses provided by ms meyer as well as mr rosenbloom facilitate such an approach which we take hereinafter c retained executives’ compensation under a comparables approach the initial step in assessing whether the retention payments and disputed srp benefits deducted by petitioner in constitute reasonable_compensation involves a determination of the compensation earned by the retained executives for other than the challenged payments the amounts received by the retained executives as base salary and stip for are undisputed herein however the parties and their experts disagree on how to account for certain other compensatory payments related to including perquisites ltip compensation and the srp benefits payments as noted both experts obtained compensation information for comparable executives from sec proxy filings their disagreements concerning the compensation of the retained executives in the main concern the appropriate adjustments to be made to the retained executives’ compensation to make it conform to the reporting conventions used in such sec filings i perquisites because the sec proxy filings utilized by the experts generally did not disclose perquisites paid to a reporting company’s executives unless the perquisites’ value exceeded in the aggregate the lesser_of either dollar_figure or percent of salary and bonus ms meyer took the position that perquisites of the retained executives should be excluded from their compensation when comparing it to the compensation of executives as reported in proxy filings mr rosenbloom by contrast included all perquisites in the retained executives’ compensation regardless of amounts we agree with ms meyer that the perquisites of the retained executives for should be disregarded insofar as they fall below sec reporting thresholds to conform with the conventions underlying the disclosed compensation of executives to which they are being compareddollar_figure however we find that ms meyer erred in see c f_r sec b iii c we also agree with ms meyer’s position that reimbursements for moving_expenses should be excluded from perquisites for purposes of comparisons to compensation reported in proxy filings we therefore disregard dollar_figure in moving continued disregarding all perquisites for all retained executives two of the retained executives--mr brink and mr francis--received perquisites in that according to petitioner’s own calculations exceeded the sec reporting thresholds the perquisites of mr brink dollar_figure and of mr francis dollar_figure exceeded percent of their respective salary and bonus for that year accordingly we conclude that the perquisites of these two retained executives should be included in their compensation_for purposes of comparing it to the compensation of other executives ii ltip compensation petitioner made payments totaling dollar_figure to the retained executives in date pursuant to the ltip arrangements with respect to petitioner’s financial performance for the years and dollar_figure in her opening report ms meyer included the ltip payouts in the retained executives’ compensation_for the year period however in measuring the retained executives’ compensation in her rebuttal report ms meyer took the position that no portion of the ltip payouts should be included in compensation because such amounts were not continued expenses paid to mr pugh in mr pugh’s remaining perquisites fall below sec reporting thresholds mr garrett did not receive an ltip award and mr pugh’s award covered only and see supra note vested until the end of and not paid until further ms meyer contended such long-term incentive compensation awards are not reported in sec proxy filings until the conclusion of the performance period53 and thus inclusion of any portion in would be inconsistent with the conventions under which the compensation of comparable executives was disclosed mr rosenbloom took the position that a ratable portion ie percent of a retained executive’s ltip award should be treated as compensation earned in for purposes of establishing reasonable_compensation under sec_280g we believe ms meyer’s position is untenable ms meyer would have us ignore compensatory payments to the retained executives that were generally nearly triple their annual base salaries even though it is undisputed that the payments were earned over a 3-year period that began with dollar_figure further ms meyer’s contention that the ltip award was not vested until the completion of the performance period is belied by the evidence in this case mr pugh whose employment was terminated effective date received an ltip based on his services in and moreover ms meyer’ sec_53 see c f_r sec b iv c although the retained executives were not advised of the final terms of the ltip until early their rights to an ltip award were secured in the employment agreements and certain of the retained executives participated in the development of the ltip arrangements during insistence on adherence to sec disclosure conventions in this circumstance actually produces significant distortions specifically ms meyer would exclude any portion of the ltip payout from the measurement of the retained executives’ compensation while at the same time she includes in the compensation of her purportedly comparable executives any long- term incentive compensation payouts to them that happen to be disclosed for such amounts are included in the compensation of her purportedly comparable executives even where they represent compensation_for multiple yearsdollar_figure thus the version of conformity to sec disclosure conventions that ms meyer advocates systematically inflates the compensation of her purported comparables in relation to her computation of the compensation of the retained executives which generates a distorted comparison favoring petitioner’s position we accordingly reject it we believe that a clear_and_convincing showing of reasonable_compensation for purposes of sec_280g in this case must take some account of the substantial ltip payouts made to the retained executives mr rosenbloom’s determination to treat the for example ms meyer includes in the compensation of comparable executives bielenski and baisley of w w grainger inc their long-term incentive compensation payouts in of dollar_figure and dollar_figure respectively even though that company’s proxy materials in the record disclose that the payouts covered fiscal years ltip payouts as earned ratably over the 3-year period covered by the ltip arrangements is reasonable and we accept itdollar_figure we accordingly shall treat the retained executives’ compensation_for purposes of determining its reasonableness in this case as including percent of the ltip payout covering the period except in the case of mr pugh whose ltip payout covered only and and is therefore allocated percent to iii srp benefits petitioner made payments of srp benefits and related interest totaling dollar_figure to the retained executives in date under the terms of the employment agreements as amended in petitioner deducted these amounts in and takes the position herein that these amounts were fully earned by the retained executives in because unlike the retention payments they were not subject_to clawback if a ms meyer faults mr rosenbloom’s inclusion on a pro_rata basis arguing that if any amount of the ltip payout is to be included in the retained executives’ compensation it should be not percent because the ltip arrangements weighted petitioner’s financial performance in and pincite and percent respectively in computing the amount of an ltip award without further evidence we are not persuaded that ratable inclusion should be supplanted by a weighted inclusion corresponding to the weighting of petitioners’s annual financial performance used in computing the ltip award retained executive failed to complete the 4-year term of employment provided in the employment agreements as amended ms meyer for purposes of measuring the retained executives’ compensation to test it for reasonableness took a position similar to her position regarding the ltip payouts namely that the srp benefits should be disregarded ms meyer would disregard this aggregate payment exceeding dollar_figure million made to the retained executives in on the grounds that the srp benefits were similar to the supplemental retirement plans of the purportedly comparable executives and that under sec disclosure conventions the value of such supplemental retirement plans would not be included in the compensation of these comparable executives disclosed in the sec proxy materials thus inclusion of the srp benefits would inflate the retained executives’ compensation in relation to the compensation of the comparable executives as reported in the sec proxy materials in ms meyer’s view mr rosenbloom treated the srp benefits identically to the retention payments including a pro_rata portion of the payment based on the number of years during the period that a retained executive remained employed with petitioner we conclude that neither expert has satisfactorily accounted for the srp benefits for purposes of assessing the reasonableness of the compensation of the retained executives ms meyer’s decision to disregard the payment cannot withstand scrutiny even if one were to accept ms meyer’s contention that the purportedly comparable executives she utilized had supplemental retirement plans similar to the retained executives’ ms meyer has not shown that the comparable executives received lump-sum payouts from these plans absent retirement or termination of employment as occurred with the retained executives ms meyer claimed in trial testimony that many executives received payouts from supplemental retirement plans in in anticipation of an increase in federal_income_tax rates in but her report contains no documentation that this occurred in the case of any of her purportedly comparable executives we are unpersuaded that the lump-sum payouts of retirement benefits that the retained executives received in in the form of the srp benefits are so similar to the supplemental retirement plans of comparable executives that they can be ignored to the contrary the lump-sum payouts of the srp benefits which ranged from to more than times a retained executive’s base salary were extraordinary in circumstance and amount any attempt to demonstrate the reasonableness of the retained executives’ compensation that simply disregards the srp benefits falls far short of clear_and_convincing in our view while it is possible that some portion of the srp benefits is theoretically allocable to services provided in years other than petitioner has made no showing in this regard and instead has stipulated that the srp benefits were earned by the retained executives in in addition the srp benefits were paid in and deducted in full by petitioner in that year in these circumstances giving due regard to the fact that petitioner bears a clear_and_convincing burden_of_proof we find that the srp benefits are allocable in full to the retained executives’ compensationdollar_figure as earlier noted supra note respondent has conceded that a portion of the srp benefit paid to each retained executive should not be treated as contingent on a change_of control under q a-24 c of the proposed_regulations see sec_1_280g-1 q a-24 c proposed income_tax regs fed reg date respondent maintains his position that the remainder of the srp benefits not excluded from parachute as noted we are also unpersuaded by mr rosenbloom’s position that the srp benefits should be allocated ratably over the years in the period in which a retained executive remained employed by petitioner the same treatment he applied to the retention payments since the retention payments were subject_to clawback while the srp benefits were not we do not believe that the same treatment is appropriate for both types of payments moreover the ratable allocation advocated by mr rosenbloom conflicts with the parties’ stipulation that the srp benefits were earned in payment treatment under q a-24 c are parachute paymentsdollar_figure the total srp benefits paid to each retained executive the amount conceded by respondent as not contingent on a change in control under q a-24 c of the proposed_regulations and the remainder that respondent contends is a parachute_payment are as follows srp benefit noncontingent amount remainder dollar_figure denny big_number francis big_number free big_number garrett hite big_number kurczewski big_number richardson big_number williams big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number because we conclude that the srp benefits should be treated as compensation earned by the retained executives in those portions of the srp benefits conceded by respondent as excluded from parachute_payment treatment under q a-24 c are treated as part of the retained executives’ compensation_for purposes of assessing whether petitioner has shown that the retention payments and the disputed srp the parties have also stipulated that the amounts denominated as interest_paid with respect to the srp benefits are deductible by petitioner in pursuant to sec_163 messrs brink pugh and thompson did not receive any srp benefits benefits constitute reasonable_compensation for purposes of sec_280g iv summary applying the foregoing determinations regarding the appropriate measure of the retained executives’ compensation produces the amounts of compensation excluding the retention payments and the disputed srp benefits summarized in the following table retained executive salary stip ltip1 srp benefit perquisites total noncontingent dollar_figure dollar_figure brink dollar_figure dollar_figure dollar_figure denny big_number big_number big_number dollar_figure big_number francis big_number big_number big_number big_number big_number big_number free big_number big_number big_number big_number big_number garrett big_number big_number big_number big_number hite big_number big_number big_number big_number big_number kurczewski big_number big_number big_number big_number big_number pugh big_number big_number big_number big_number richardson big_number big_number big_number big_number thompson big_number big_number big_number big_number williams big_number big_number big_number big_number prorated portion of ltip paid in with respect to services rendered during except for mr pugh whose proration for is one-half because he rendered services only in and d determination of comparable executives and their compensation the experts differed regarding the choice of comparable executives and the determination of their compensation we next consider those differences in determining the extent to which petitioner has clearly and convincingly demonstrated the amount of compensation that was reasonable for the retained executives in i selection of comparable companies the experts differed to some extent in their choices of companies they considered comparable to petitioner in her rebuttal report ms meyer used companies she considered comparable chosen from what she termed the labor market of the retained executives which she defined somewhat crudely to include any company that electricity runs through and that met one of two additional criteria i the company was one for which the retained executives would be qualified to work or ii it was one from which petitioner could draw executives to replace any of its own executives who decided to leave mr rosenbloom’s list was confined to of the companies used by ms meyer mr rosenbloom considered only companies in the value line electrical equipment industry group which group contained petitioner thereby excluding electrical equipment manufacturers that were primarily defense contractors or tied to telecommunications satellite or other high technology industries these excluded high technology companies he explained were in less stable markets and thus not comparable to petitioner whose business was based on a mature technology with products that changed only incrementally in line with this reasoning mr rosenbloom specifically criticized ms meyer’s use of four companies as comparables--general instrument corp litton industries inc rockwell international corp and varian associates inc --on the grounds that all were substantially dissimilar from petitioner either as primarily defense contractors or as high technology companies involved in an industry characterized by rapid technological change and growth we find mr rosenbloom’s critique persuasive we are convinced that petitioner was engaged in a relatively mature industry characterized by incremental product changes in distinct contrast to the high technology companies and defense contractors included as comparables by ms meyer as noted the legislative_history of sec_280g specifically endorses the use of similarly situated employees working for comparable employers as a means of determining reasonable_compensation s rept supra pincite c b vol pincite h rept supra pincite c b vol pincite the differences highlighted by mr rosenbloom persuade us that some of the companies used by ms meyer are not comparable employers finding mr rosenbloom’s analysis persuasive we accept as comparable the companies common to both experts’ listsdollar_figure we reject as comparables the four companies noted above those companies are cooper industries inc emerson electric co general signal corp w w grainger inc honeywell inc hubbell inc johnson controls inc magnetek inc thomas betts corp and westinghouse electric corp however magnetek inc is generally disregarded because its proxy materials in the record are not comparable in format to the other companies used by ms meyer in the absence of a specific critique from mr rosenbloom we accept as comparable three of the remaining four companies used by ms meyer but not by mr rosenbloom namely amp inc baldor electric co and danaher corpdollar_figure ii selection of comparable executives and their compensation the experts also differed in some instances in their choice of the executives of a comparable company that they deemed comparable to a given retained executive upon review of their differences we are persuaded that ms meyer’s choices were in general better reasoned for example in the case of mr denny executive vice president and chief operating officer of petitioner mr rosenbloom chose the chief administrative officer of honeywell inc rather than the chief operating officer relied upon by ms meyer in the case of mr kurczewski corporate vice president general counsel and secretary of petitioner mr rosenbloom failed to include messrs smith and kennedy who were vice president general counsel and secretary of general signal and johnson controls respectively and mr grayson who was vice president and general counsel of honeywell inc all three of whom were included by ms meyer accordingly we have generally deferred to ms meyer’s judgment concerning the the fourth raychem corp is disregarded because its proxy materials in the record are not comparable in format to the other companies’ executives that were comparable to a specific retained executive in circumstances where the experts differed except as specifically noted in a similar vein even where the two experts agreed that a given executive was comparable to a retained executive they frequently differed regarding the amount of compensation they attributed to the executive in resolving this difference we rely on the fact that ms meyer demonstrated several instances where mr rosenbloom’s methodology diverged from standard practice and or sec disclosure conventions in addition to mr rosenbloom’s treatment of perquisites in a manner inconsistent with sec disclosure conventions discussed above ms meyer convincingly demonstrates that mr rosenbloom used nonstandard methods for valuing stock_options restricted_stock and the costs of defined benefit and defined contribution plansdollar_figure frequently though not always ms meyer’s compensation figure for a comparable executive was less than mr rosenbloom’s figure a position that disfavored the position of petitioner her client overall given the demonstrated idiosyncracies in mr rosenbloom’s methods of computing compensation we defer to ms respondent even concedes on brief that some of mr rosenbloom’s methodology in valuing compensation merits criticism meyer’s computations of a comparable executive’s compensation in instances where the experts differ e range of reasonable_compensation using their selection of comparable executives each expert developed a range of compensation he or she considered reasonable for each retained executive mr rosenbloom computed a median of the compensation paid to the executives he deemed comparable he then chose a range of compensation he considered reasonable based on his assessment of the duties and responsibilities of the retained executive compared with those of the comparable executives he considered reasonable_compensation to fall within a narrow range of compensation in several cases that narrow range contained the median figure and in several cases the range was less than the median thus in several cases mr rosenbloom found that the maximum reasonable_compensation for a given retained executive was less than the median compensation of the executives he had selected as comparable mr rosenbloom’s limited view of what constitutes reasonable_compensation makes it appear that a substantial number of the executives he deemed comparable executives were paid compensation in excess of a reasonable amount calling into question the validity of the assumptions underlying his analysis at the very least mr rosenbloom does not sufficiently explain his conclusion that reasonable_compensation for the retained executives was an amount near or less than the median of compensation of purportedly comparable executives for this reason we reject his conclusions regarding an appropriate range of reasonable_compensation ms meyer’s approach was broadly similar but her assumptions and conclusions reflect important differences like mr rosenbloom ms meyer generated a list of purportedly comparable executives for each of the retained executives however in addition to computing the median of the range of compensation_for each retained executive she also computed the 75th and 90th percentiles based on her review of the duties and responsibilities of the retained executives’ positions and on petitioner’s strategic need to maximize its retention of the retained executives she believed that compensation was reasonable if it fell within the 75th and 90th percentile of the range of compensation paid to comparable executives we agree with ms meyer petitioner’s specialized circumstances at the time support ms meyer’s conclusion that petitioner would have expected to pay premium compensation to the retained executives first of all the retained executives were required to assume the duties of seven former executives who left petitioner’s employment following the change in control including petitioner’s chairman and chief_executive_officer vice president and chief financial officer and corporate vice president-sales moreover we are persuaded that as schneider’s management itself believed and the retained executives were aware schneider’s options for obtaining senior management other than the retained executives to manage petitioner’s operations were quite limited which would tend to add a premium to what the retained executives would be paid without regard to any leverage they possessed by virtue of their rights to the termination awards in addition petitioner had been restructured from a publicly traded u s company to a wholly owned subsidiary of a foreign_corporation as one retained executive testified this increased various risks to petitioner’s executives resulting from for instance potential limits on upward mobility due to a preference for promoting foreign nationals the increased likelihood of assignment overseas and the potential clash of business cultures for these reasons we find that petitioner should have expected to pay compensation at the upper end of the reasonable_compensation range to retain the services of the retained executives thus we believe petitioner has shown clearly and convincingly that reasonable_compensation for each retained executive would have been an amount not exceeding the 90th percentile of the range of compensation paid to comparable executives working for comparable companies f reasonable_compensation established for each retained executive having concluded that of the companies identified by the experts are comparable that ms meyer’s selection of comparable executives within those companies and her computation of their compensation is more reliable than mr rosenbloom’s and that reasonable_compensation in for the retained executives would be an amount not exceeding the 90th percentile of the range of compensation paid to comparable executives in that year we proceed to consider each retained executive and the amount of compensation shown to have been reasonable for him in i mr brink ms meyer identified executives in her rebuttal report that she considered comparable to mr brink in we conclude that three of those executives should be disregarded as follows mr casey of litton industries inc due to our previous determination that litton industries inc is not comparable to petitioner plus mr reiland of magnetek inc and mr everett of raychem corp because as noted the proxy disclosures of those companies for are not comparable to the remaining companies having been made prior to date regulatory changes governing disclosure formats we conclude that the remaining executives are comparable for the reasons previously outlined we use ms meyer’s computation of their compensation however one significant adjustment is required with respect to the treatment of long-term incentive plan compensation in the case of one comparable executive mr bielinski ms meyer included the entire amount of a payout of long-term incentive compensation in his compensation because the payout occurred in even though the payment covered multiple years of services conversely in the case of another comparable executive mr galvin ms meyer did not include any portion of a long-term incentive compensation payout even though the proxy materials of mr galvin’s employer indicate that he received a dollar_figure payout in paid with respect to years of services including consistent with our earlier analysis and conclusions concerning the ltip payouts to the retained executive we conclude that a ratable portion of a long-term incentive compensation payout should be included in compensation_for any year on which the payout was based we accordingly adjust the compensation of the comparable executives to do so as described in greater detail in the footnotes to the following table which summarizes the compensation of the executives determined to be comparable to mr brink compensation executive title per ms meyer nagy svp cfo dollar_figure general signal corp babcock vp-finance big_number thomas betts corp galvin svp finance controller emerson elec co 1big_number rowell evp-cfo big_number hubbell inc roell vp-cfo 2big_number johnson controls inc cross svp-finance big_number cooper indus inc bielinski vp cfo 3big_number w w grainger inc savidge evp-cfo amp inc big_number davis cfo secy big_number baldor elec co allender svp cfo big_number danaher corp added to the total compensation computed by ms meyer is percent or approximately dollar_figure of a long-term incentive compensation plan payout in of dollar_figure which the emerson elec co proxy materials in the record disclose was paid with respect to a 5-year performance period that included ms meyer’s figure includes a long-term incentive compensation plan payout of dollar_figure which according to the johnson controls inc proxy materials in the record is the portion of a long-term incentive performance award covering the period excludes dollar_figure of the total compensation computed by ms meyer representing percent of a dollar_figure long-term incentive compensation plan payout in that ms meyer included in full since the payout according to the w w grainger inc proxy materials in the record covered the company’ sec_3 fiscal years the 90th percentile of this range of compensation is dollar_figure accordingly reasonable_compensation for mr brink in would have been an amount not exceeding dollar_figure mr brink’s compensation excluding the retention payment was dollar_figure consequently petitioner has failed to show that any portion of the retention payment deducted with respect to mr brink in constituted reasonable_compensation for purposes of sec_280g ii mr denny ms meyer identified executives in her rebuttal report that she considered comparable to mr denny in we conclude that mr brann of litton industries inc should be disregarded because as noted we believe that company is not comparable to petitioner we conclude that the remaining nine executives are comparabledollar_figure respondent concedes that the entire amount of the srp benefit paid to mr brink and deducted by petitioner in was not contingent on a change in control under q a-24 c of sec_1_280g-1 proposed income_tax regs fed reg date included among these nine is an executive from rockwell international corp a company with respect to which we previously accepted mr rosenbloom’s judgment that it was not comparable to petitioner however mr rosenbloom concedes that mr davis of rockwell international corp who headed an automation equipment subsidiary is comparable to mr denny and we accordingly accept ms meyer’s use of that executive as a comparable for mr denny in addition mr rosenbloom raised specific objections to ms meyer’s use of certain other comparable executives for mr denny on balance we find these objections immaterial if one took the 90th percentile of the compensation of the executives treated by mr rosenbloom as comparable to mr denny that figure would be higher than the 90th percentile of the compensation of the executives treated as comparable by ms meyer for the reasons previously outlined we use ms meyer’s computation of their compensation however an adjustment for long-term incentive plan compensation analogous to that made for some of mr brink’s comparables is required we accordingly adjust the compensation of mr suter of emerson electric co and mr davis of baldor electric co to include in their compensation a ratable portion of long-term incentive compensation paid to them in the following table summarizes the compensation of the executives determined to be comparable to mr denny executive title compensation per ms meyer moore pres elec dollar_figure div thomas betts corp suter pres coo emerson elec co big_number bonsignore evp coo honeywell inc big_number moore evp coo honeywell inc big_number riley pres coo big_number cooper indus inc clark evp inds westinghouse elec corp big_number davis evp coo rockwell intl corp 2big_number marley pres coo big_number amp inc qualls pres coo big_number baldor elec co added to the total compensation computed by ms meyer is percent or approximately dollar_figure of a long-term incentive compensation plan payout in of dollar_figure which the emerson elec co proxy materials in the record disclose was paid with respect to a 5-year performance period that included added to the total compensation computed by ms meyer i sec_33 percent or approximately dollar_figure of a long-term incentive compensation plan payout in of dollar_figure which the rockwell intl corp proxy materials in the record disclose was paid with respect to a 3-year performance period that included the 90th percentile of this range of compensation is dollar_figure accordingly reasonable_compensation for mr denny in would have been an amount not exceeding dollar_figure mr denny’s compensation excluding the retention payment and disputed srp benefit was dollar_figure consequently petitioner has failed to show that any portion of the retention payment and disputed srp benefit deducted with respect to mr denny in constituted reasonable_compensation for purposes of sec_280g iii mr kurczewski ms meyer identified six executives in her rebuttal report that she considered comparable to mr kurczewski in we conclude that mr durmit of general instrument corp should be disregarded because as noted we believe that company is not comparable to petitioner we conclude that the remaining five executives are comparable for the reasons previously outlined we use ms meyer’s computation of their compensation however an adjustment is required to correct ms meyer’s computation of the compensation of mr baisley of w w grainger inc ms meyer included in mr baisley’s compensation the entire amount of a long-term incentive compensation payout made in even though the payout covered services rendered in fiscal years accordingly a ratable portion of the payout is removed from compensation as described in greater detail in a footnote to the following table which summarizes the compensation of the executives determined to be comparable to mr kurczewski executive title compensation per ms meyer baisley vp gc w w grainger inc 1dollar_figure davies gc secy hubell inc smith vp gc secy general signal corp grayson vp gc honeywell inc kennedy vp gc secy johnson controls inc big_number big_number big_number 2big_number excludes dollar_figure of the total compensation computed by ms meyer representing percent of a dollar_figure long-term incentive compensation plan payout in that ms meyer included in full since the payout according to the w w grainger inc proxy materials in the record covered the company’ sec_3 fiscal years ms meyer’s figure includes a long-term incentive compensation plan payout of dollar_figure which according to the johnson controls inc proxy materials in the record is the portion of a long-term incentive performance award covering the period the 90th percentile of this range of compensation is dollar_figure accordingly reasonable_compensation for mr kurczewski in would have been an amount not exceeding dollar_figure mr kurczewski’s compensation excluding the retention payment and disputed srp benefit was dollar_figure because reasonable_compensation for mr kurczewski in exceeded his compensation exclusive of the retention payment and disputed srp benefit by dollar_figure this excess constitutes the amount of mr kurczewski’s retention payment and disputed srp benefit that petitioner has shown by clear_and_convincing evidence was reasonable_compensation in for purposes of sec_280g iv messrs garrett richardson thompson and williams ms meyer identified executives in her rebuttal report that she considered comparable to petitioner’s heads of operating divisions namely messrs garrett richardson thompson and williams in we conclude that eight of those executives should be disregarded as follows mr rosso of honeywell inc and mr claramunt of danaher corp because the description of those executives’ duties in in the proxy disclosure materials in the record conflict with ms meyer’s description of their duties in messrs jeney dundon and scherzi of magnetek inc because the proxy disclosures of that company for are not comparable to the remaining companies having been made prior to date regulatory changes governing disclosure formats and messrs drendel bunker and krisbergh of general instrument corp because as noted we believe that company is not comparable to petitioner moreover mr rosenbloom specifically objected to ms meyer’s use as comparables of two executive vice presidents of johnson controls inc on the grounds that they were responsible for business segments with several billion dollars in annual revenues and therefore not comparable to petitioner’s heads of operating divisions we are persuaded by mr rosenbloom on this point and find that messrs lewis and barth of johnson controls inc should be disregarded we conclude that the seven remaining executives are comparable for the reasons previously outlined we use ms meyer’s computation of their compensation however an adjustment is required to correct ms meyer’s computation of the compensation of mr keyser of w w grainger inc ms meyer included in mr keyser’s compensation the entire amount of a long-term incentive compensation payout made in even though the payment covered services rendered in fiscal years accordingly a ratable portion of the payout is removed from compensation as described in greater detail in a footnote to the following table which summarizes the compensation of the executives determined to be comparable to petitioner’s heads of operating divisions executive title compensation per ms meyer bonke group vp general signal corp pluff group vp hubbell inc dollar_figure big_number paquette div pres thomas betts corp big_number pileggi div pres big_number thomas betts corp chenoweth sr corp big_number vp-intl honeywell inc keyser evp w w grainger inc 1big_number hassan vp-global interconn sys amp inc big_number excludes dollar_figure of the total compensation computed by ms meyer representing percent of a dollar_figure long-term incentive compensation plan payout in that ms meyer included in full since the payout according to the w w grainger inc proxy materials in the record covered the company’ sec_3 fiscal years the 90th percentile of this range of compensation is dollar_figure accordingly reasonable_compensation for petitioner’s heads of operating divisions in would have been an amount not exceeding dollar_figure aa mr garrett mr garrett’s compensation excluding the retention payment and disputed srp benefit was dollar_figure because reasonable_compensation for mr garrett in exceeded his compensation exclusive of the retention payment and disputed srp benefit by dollar_figure this excess constitutes the amount of mr garrett’s retention payment and disputed srp benefit that petitioner has shown by clear_and_convincing evidence was reasonable_compensation in for purposes of sec_280gdollar_figure bb mr richardson mr richardson’s compensation excluding the retention payment and disputed srp benefit was dollar_figure because reasonable_compensation for mr richardson in exceeded his compensation exclusive of the retention payment and disputed srp benefit by dollar_figure this excess constitutes the amount of mr richardson’s retention payment and disputed srp benefit that petitioner has shown by clear_and_convincing evidence was reasonable_compensation in for purposes of sec_280g respondent also argues that mr garrett’s retention payment but not his srp benefit cannot be reasonable_compensation for services because it is a severance payment within the meaning of q a-44 of sec_1_280g-1 proposed income_tax regs fed reg date we need not address this contention however because the disputed srp benefit received by mr garrett which respondent concedes is not a severance payment equaled dollar_figure we conclude above that petitioner has established that dollar_figure of the combined retention payment and srp benefit paid to mr garrett in constituted reasonable_compensation amounts above this figure are not reasonable_compensation for services accordingly dollar_figure of the dollar_figure srp benefit is reasonable_compensation but the remainder of the srp benefit and all of the retention payment is not because mr garrett’s retention payment would not in any event constitute reasonable_compensation we need not decide whether it is also not reasonable_compensation because it is a severance payment cc mr thompson mr thompson’s compensation excluding the retention payment was dollar_figure because reasonable_compensation for mr thompson in exceeded his compensation exclusive of the retention payment by dollar_figure this excess constitutes the amount of mr thompson’s retention payment that petitioner has shown by clear_and_convincing evidence was reasonable_compensation in for purposes of sec_280g dd mr williams mr williams’s compensation excluding the retention payment and disputed srp benefit was dollar_figure because reasonable_compensation for mr williams in exceeded his compensation exclusive of the retention payment and disputed srp benefit by dollar_figure this excess constitutes the amount of mr williams’s retention payment and disputed srp benefit that petitioner has shown by clear_and_convincing evidence was reasonable_compensation in for purposes of sec_280g v messrs francis free hite and pugh with respect to messrs francis free hite and pugh ms meyer was unable to find any sec proxy disclosures of compensation_for comparable executives ie for a chief mr thompson did not receive a srp benefit technology officer mr francis treasurer mr free director of human resources mr hite or sales and marketing executive mr pugh dollar_figure consequently to demonstrate the reasonableness of the foregoing executives’ compensation she used data from the executive compensation surveys that we have rejected because we have concluded that the survey data does not satisfy the requirements of comparability ms meyer’s effort to show reasonableness through this technique must fail mr rosenbloom encountered the same problem and solved it by using the assumption that since sec proxy materials generally disclose the compensation of the five most highly compensated officers comparable executives to the foregoing retained executives must have earned less than the lowest paid officer disclosed in proxy materials of a comparable companydollar_figure ms meyer criticized this approach by arguing that although the sec proxy rules require disclosure of the compensation paid to a company’s chief executive and four most highly compensated although mr rosenbloom treated mr pugh as the head of an operating division ms meyer contends that this categorization was erroneous because mr pugh had sales and marketing responsibilities consistent with our previous conclusion that ms meyer demonstrated superior judgment in comparing the duties and responsibilities of the retained executives with those of comparable executives we accept ms meyer’s judgment that mr pugh cannot appropriately be compared to the head of an operating division because mr rosenbloom treated mr pugh as equivalent to the head of an operating division see supra note he did not apply this assumption to mr pugh executive officers corporations have wide latitude in defining their executive officers see c f_r secs a 3b-7 according to ms meyer for a variety of internal reasons a company’s four most highly compensated executive officers may not in fact be that company’s four most highly compensated employees we find ms meyer’s criticism persuasive in light of i our conclusion that ms meyer’s effort to demonstrate the reasonableness of the compensation of messrs francis free hite and pugh is based on the executive compensation surveys that are not comparable and ii the fact that the percentage increase in the pre- and postacquisition compensation of messrs francis free hite and pugh wa sec_178 sec_367 sec_245 and sec_384 percent respectively we conclude that petitioner has failed to establish clearly and convincingly that any portion of the retention payments or disputed srp benefits of these executives deducted by petitioner in constituted reasonable_compensation for purposes of sec_280g to reflect the foregoing decision will be entered under rule