Court Opinion

ID: 4334607
Source: CourtListenerOpinion
Date Created: 2018-11-14 01:45:54.946973+00
Date Added: 2024-06-11T14:17:29.053409
License: Public Domain

121 T.C. No. 11

                UNITED STATES TAX COURT

   SQUARE D COMPANY AND SUBSIDIARIES, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6067-97.             Filed September 26, 2003.

     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 $1.125 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
                         - 2 -

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 1990, prior to S’s acquisition of P, certain
executives of P who were “disqualified individuals”
within the meaning of sec. 280G(c), I.R.C., obtained
employment agreements (1990 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 3 years of the
acquisition. The lump-sum payments would have been
parachute payments within the meaning of sec.
280G(b)(2), I.R.C.

     S’s acquisition of P in May 1991 triggered the
executives’ rights to the parachute payments under the
1990 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 (1991 agreements) with the executives. The
executives used their rights to parachute payments
under the 1990 agreements as leverage to secure lump-
sum payments under the 1991 agreements. The lump-sum
payments provided in the 1991 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 3
years through 1994. The 1991 agreements were
subsequently amended to accelerate the payment of the
lump sums (in a reduced amount) to December 1992 in
exchange for an extension of the employment term for an
additional year through 1995.

     Held, under the facts of this case, the lump-sum
payments (excluding a portion conceded by R to be
                              - 3 -

     otherwise) paid under the 1991 agreements as amended,
     were contingent on a change in ownership or effective
     control within the meaning of sec. 280G(b)(2)(A)(i),
     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(b)(2)(A)(i), I.R.C., is
     interpreted in light of legislative history.
     Accordingly, the payments are parachute payments for
     purposes of sec. 280G(b)(2), I.R.C.

          Held, further, whether P has established that any
     portion of the parachute payments was reasonable
     compensation for purposes of sec. 280G(b)(4)(A),
     I.R.C., must be determined on the basis of a
     multifactor test, considering all the facts and
     circumstances. Exacto Spring Corp. v. Commissioner,
     196 F.3d 833 (7th Cir. 1999), revg. Heitz v.
     Commissioner, T.C. Memo. 1998-220, applying an
     independent investor test to determine reasonable
     compensation for purposes of sec. 162(a), 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(b)(4)(A),
     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.
                               - 4 -

                             CONTENTS

FINDINGS OF FACT   . . . . . . . . . . . . . . . . . . . . . . . 7

I.    Background . . . . . . . . . . . . . . . . . . . . . . . . 7

II.   Loan Commitment and Legal Fees Arising From Acquisition of
      Petitioner . . . . . . . . . . . . . . . . . . . . . . . . 8
      A.   The Commitment Letter . . . . . . . . . . . . . . . . 8
      B.   Takeover Events and Litigation . . . . . . . . . . 10
      C.   Commitment Letter Addendum . . . . . . . . . . . . 12
      D.   The Bridge Loan . . . . . . . . . . . . . . . . . . 13
      E.   The Term Loan . . . . . . . . . . . . . . . . . . . 14
      F.   Payment of the Commitment and Legal Fees . . . . . 15

III. Executive Compensation . . . . . . . . . . . . . . . . . 15
     A.   Background . . . . . . . . . . . . . . . . . . . . 15
Barb. 1990 Employment Agreements . . . . . . . . . . . . 16
     C.   Importance of Schneider’s Retaining Petitioner’s Key
          Executives . . . . . . . . . . . . . . . . . . . . 20
     D.   Negotiations Between Retained Executives and Schneider
          Over New Employment Agreements . . . . . . . . . . 21
     E.   1991 Employment Agreements . . . . . . . . . . . . 24
     F.   Mr. Garrett’s Termination . . . . . . . . . . . . . 29
     G.   The 1992 Amendments . . . . . . . . . . . . . . . . 29
     H.   Other 1992 Compensation of Retained Executives . . 32
     I.   Retained Executives’ Pre- and Postacquisition
          Compensation . . . . . . . . . . . . . . . . . . . 34
     J.   Retained Executives’ Duties and Responsibilities . 35

IV.   Tax Returns, Notice of Deficiency, and Petition    . . . .   36

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . .      37

I.    Loan Commitment and Legal Fees . . . . . . . . . . . . .     37
      A.   The Legal Obligation To Pay the Loan Costs . . . .      40
      B.   Reimbursed Expenses . . . . . . . . . . . . . . . .     45

II.   Parachute Payments . . . . . . . . . . . . . . .   . . . . 51
      A. General Requirements of Section 280G . . . .    . . . . 52
      B. Whether Payments Were Contingent on a Change    in Control
             . . . . . . . . . . . . . . . . . . . . .   . . . . 54
      C. Reasonable Compensation--Applicable Test . .    . . . . 65
      D. Determination of Reasonable Compensation . .    . . . . 74
           1. Overview of Expert Testimony . . . . .     . . . . 74
           2. Historical Compensation . . . . . . . .    . . . . 78
           3. Analysis of Comparables . . . . . . . .    . . . . 82
               - 5 -

a.   Relevant Period for Reasonable Compensation
     Comparison . . . . . . . . . . . . . . . 82
b.   Aggregate Versus Individual Compensation    86
c.   Retained Executives’ 1992 Compensation . 88
     (i)   Perquisites . . . . . . . . . . . . 89
     (ii) LTIP Compensation . . . . . . . . . 90
     (iii) 1991 SRP Benefits . . . . . . . . . 93
     (iv) Summary . . . . . . . . . . . . . . 98
d.   Determination of Comparable Executives and
     Their Compensation . . . . . . . . . . . 98
     (i)   Selection of Comparable Companies . 99
     (ii) Selection of Comparable Executives and
           Their 1992 Compensation . . . . . . 101
e.   Range of Reasonable Compensation . . . . 103
f.   Reasonable Compensation Established for Each
     Retained Executive . . . . . . . . . . . 106
     (i)   Mr. Brink . . . . . . . . . . . . . 106
     (ii) Mr. Denny . . . . . . . . . . . . . 109
     (iii) Mr. Kurczewski . . . . . . . . . . 112
     (iv) Messrs. Garrett, Richardson, Thompson,
           and Williams . . . . . . . . . . . 114
           (aa) Mr. Garrett . . . . . . . . . 116
           (bb) Mr. Richardson . . . . . . . 117
           (cc) Mr. Thompson . . . . . . . . 118
           (dd) Mr. Williams . . . . . . . . 118
     (v)   Messrs. Francis, Free, Hite, and Pugh
           . . . . . . . . . . . . . . . . . . 118
                               - 6 -

     GALE, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes of $7,420,227, $28,971,522, and

$15,285,996 for the taxable years 1990, 1991, and 1992,

respectively.   Petitioner claims overpayments of $12,486,577 and

$18,289 for taxable years 1990 and 1992, respectively.

     After concessions, the issues remaining for decision1 are:

     (1)   Whether petitioner may deduct in 1991 a loan commitment

fee incurred in connection with the provision of financing for

petitioner’s acquisition.   We hold that petitioner may.

     (2)   Whether petitioner may deduct in 1991 legal fees

incurred in connection with the provision of financing for

petitioner’s acquisition.   We hold that petitioner may.

     (3) Whether certain lump-sum payments made by petitioner to

senior executives in 1992 and deducted in that year were

contingent on a change in the ownership or effective control of

petitioner within the meaning of section 280G(b)(2)(A)(i).2   We

hold that they were.

     (4) What part, if any, of the foregoing payments constituted

reasonable compensation in 1992 within the meaning of section

     1
       An additional issue involving the application of sec.
267(a)(3) has been addressed in a separate opinion. See Square D
Co. & Subs. v. Commissioner, 118 T.C. 299 (2002).
     2
       Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for taxable years 1991 and 1992,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                                - 7 -

280G(b)(4)(A).    We hold that petitioner has established that a

portion of the payments was reasonable compensation.

                          FINDINGS OF FACT

I.   Background

     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 1991 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 1990,
                               - 8 -

“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 1990 or early 1991, 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

February 18, 1991 (Commitment Letter), in which they agreed

(subject to various conditions) to (1) 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 $1 billion; and

(2) underwrite permanent financing of one-half of the purchase
                               - 9 -

price of petitioner, up to a maximum of $900 million (the Term

Loan).3

     As consideration for the French banks’ financing commitment,

the Commitment Letter required Schneider to pay a nonrefundable

loan commitment fee equal to 0.3 percent per annum on $1 billion,

payable monthly in advance from the date that receipt of the

Commitment Letter was acknowledged by Schneider (February 18,

1991) until the Bridge Loan was disbursed, but no later than

December 31, 1991.4   The Commitment Letter set forth the basic

     3
       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.
     4
       The Commitment Letter, addressed to Schneider
specifically, stated at section D.(a):

          Your Company shall pay our two Banks * * * a
     commitment fee of 0.30% * * * 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 US$ 1,000,000,000 (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 December 31, 1991, 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 [i.e., 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 (i.e. SCHNEIDER and the subsidiaries subject
     to consolidation) agrees * * * not to proceed to
     acquire new interests other than those of * * *
                                                   (continued...)
                               - 10 -

terms of the Bridge and Term Loans, including commitment fees of

0.3 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 February 19, 1991, Schneider submitted to petitioner’s

     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.
                              - 11 -

board of directors a proposal to acquire all outstanding shares

of petitioner’s stock for $78 per share, or a total purchase

price of approximately $2 billion.     Petitioner’s board of

directors rejected the proposal on February 27, 1991, 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 February 28, 1991, 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 100 percent of ACQ.     On March 4, 1991,

ACQ made a hostile cash tender offer of $78 per share (Tender

Offer) to petitioner’s shareholders.     On March 10, 1991,

petitioner’s board of directors rejected the Tender Offer as

inadequate and recommended that petitioner’s shareholders do the

same.

     On April 12, 1991, 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.
                              - 12 -

     On April 23, 1991, Schneider indicated it was willing to

increase the price of the Tender Offer, and on May 11, 1991,

officials of both companies agreed on a price of $88 per share

(Revised Tender Offer).   The following day, May 12, 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 $2.25 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 12), 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 May 13, 1991, in which the French

banks agreed to increase the Bridge and Term Loans by an

additional $125 million, for a total loan commitment of $1.125

billion, or one-half of the revised acquisition price of $2.25
                               - 13 -

billion (Commitment Letter Addendum).5   The Commitment Letter

Addendum specifically provided that the conditions enumerated in

section D.(a) of the Commitment Letter (i.e., Schneider’s

obligation to pay loan commitment fee, see supra note 4), applied

to the additional funds described in the Commitment Letter

Addendum.

     D.     The Bridge Loan

     On May 30, 1991, 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 $1.125

billion to purchase petitioner’s outstanding shares.    Section 2.2

of the Bridge Loan agreement provided:

     Commitment Fee. On July 12, 1991, 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 [May 30, 1991] to and including July
     12, 1991 (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 (0.30%) 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 its

     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.
                              - 14 -

obligation to pay a commitment fee from February 18, 1991 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,[6] 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 $1.125 billion to

ACQ on June 12, 1991.7

     E.   The Term Loan

     On August 19, 1991, 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 August 22, 1991, ACQ merged

     6
       “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 Mar. 4, 1991, as
supplemented.
     7
       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.
                                - 15 -

into petitioner, which assumed ACQ’s obligations as the surviving

corporation.8    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 100

percent of petitioner’s shares.

     F.      Payment of the Commitment and Legal Fees

     Schneider paid a $1,056,020 commitment fee to the French

banks and in December 1991 sent an invoice for reimbursement of

that amount to petitioner.     In March 1993 petitioner paid

$1,056,020 to Schneider as reimbursement.

         In August 1991, Rogers & Wells submitted an invoice to

Banque Paribas for $699,027 covering services performed and costs

incurred in the period of March 21 through July 31, 1991,

relating to the litigation and Federal Reserve Board proceedings.

Banque Paribas forwarded the Rogers & Wells invoice to Schneider

in August 1991 and petitioner paid it in September of that year.

III. Executive Compensation

     A.      Background

     In December 1990, prior to its acquisition by Schneider,

petitioner, as a result in part of concerns about a possible

     8
       The form of this transaction is typically known as a
reverse subsidiary merger. See Ginsburg & Levin, Mergers,
Acquisition, and Buyouts, par. 202, at 2-15 (2002).
                              - 16 -

hostile takeover, entered into employment agreements (1990

Employment Agreements) with its 18 most senior executives.

     For several years prior to the execution of the 1990

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 18 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.   1990 Employment Agreements

     The 1990 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 20

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 1990 Employment Agreements and for

purposes of section 280G(b)(2)(A), occurred on May 29, 1991.    The
                              - 17 -

employment period provided under the 1990 Employment Agreements

therefore began on May 29, 1991, and ended on May 28, 1994.

     The 1990 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 1990 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; i.e., May 30 through June 28, 1992 (hereafter,

the June 1992 Window).   Thus, the 1990 Employment Agreements

granted each executive who entered them substantial payments if,

during the 3 years after a change in control, the executive (i)

was involuntary terminated (without “cause”), (ii) ceased

employment voluntarily upon a modification of his duties,

     9
       “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.
                                 - 18 -

location, or travel burden, or (iii) at his complete discretion,

ceased employment during the June 1992 Window.

     The payment to which an executive became entitled under the

1990 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 SRP.10

     Seven of the 18 senior executives who were parties to the

1990 Employment Agreements terminated their employment either

     10
       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.
                              - 19 -

voluntarily or involuntarily in 1991 (or, in one case, 1992) and

received the Termination Award and SRP Cashout under the 1990

Employment Agreements.   Petitioner treated these payments as

parachute payments for purposes of section 280G.   The remaining

11 senior executives who were parties to the 1990 Employment

Agreements (Retained Executives) entered into new employment

agreements with petitioner on November 14, 1991 (1991 Employment

Agreements), covering their services after that date, which

replaced the 1990 Employment Agreements.11   The 1991 Employment

Agreements are described more fully hereinafter.   The Retained

Executives and their pre- and post-control-change titles were as

follows:

     11
       Two Retained Executives did not execute their 1991
Employment Agreements until early 1992.
                                      - 20 -
       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 $2.25 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
                              - 21 -

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 1990 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 1990 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 June 1992

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 1990 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 1990
                              - 22 -

Employment Agreements.   The Retained Executives’ entitlement to

the Termination Awards and SRP Cashouts under the 1990 Employment

Agreements gave them additional leverage in their negotiations

with Schneider over the terms of their future employment.

     From July 23 to July 25, 1991, 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 1990 Employment Agreements and granted a performance award of

up to 600 percent of each executive’s salary.

     The Retained Executives reacted negatively to this proposal,

concluding in a July 29 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 1990 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 1990

Employment Agreements be cashed out as a prerequisite to entering
                              - 23 -

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 [1990 Employment Agreement] contract”.

The letter further stated that “The decision by Schneider is very

simple * * * Pay now or pay later.”

     By August 1, 1991, 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 August 13, 1991, 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 1991.   By the beginning of October, Schneider had
                              - 24 -

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 300

percent of base salary plus a 1992 STIP award if that executive

remained with petitioner through December 31, 1994.    The bonus

percentage would have increased to 350 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 1990 Employment Agreements.

     E.   1991 Employment Agreements

     The Retained Executives entered into the 1991 Employment

Agreements on November 14, 1991.12    The 1991 Employment

Agreements nullified and replaced the 1990 Employment Agreements.

     12
       Messrs. Francis and Richardson did not enter new
employment contracts until early 1992, but their agreements were
essentially the same as the agreements signed by the other
Retained Executives. Hereinafter, unless otherwise noted, the
term “1991 Employment Agreements” shall include the agreements
signed by Messrs. Francis and Richardson in early 1992.
                              - 25 -

By signing the 1991 Employment Agreements, the Retained

Executives surrendered their rights to Termination Awards and SRP

Cashouts under the 1990 Employment Agreements.

     Petitioner and the Retained Executives had no explicit or

implicit legal obligation under the 1990 Employment Agreements or

any other agreements to enter into the 1991 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 1990

Employment Agreements).

     The 1991 Employment Agreements established a fixed

employment period for each Retained Executive from the date of

the agreement through December 31, 1994, unless terminated sooner

in accordance with the provisions of the agreement.   The 1991

Employment Agreements generally increased the 1991 base salaries

for each Retained Executive and provided for a 20-percent

increase in 1992 base salaries and an annual bonus (i.e., STIP

award).   The 1991 Employment Agreements also entitled each

Retained Executive to participate in a long-term incentive

compensation plan (LTIP).   The 1991 Employment Agreements further

provided that if a Retained Executive remained continuously

employed by petitioner until December 31, 1994, he would receive

a lump-sum payment (Retention Payment) equal to 3.7 times his
                              - 26 -

base salary plus targeted STIP award13 for 1992 and a payment of

his supplemental retirement benefits (1991 SRP Benefit) equal to

the greater of (a) the SRP Cashout, if any, that would have been

payable as of December 31, 1991,14 under his 1990 Employment

Agreement if petitioner had terminated him without cause under

his 1990 Employment Agreement on that date, plus interest from

December 31, 1991, 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 1991 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 1991 SRP Benefit plus interest for each Retained Executive

exceeded the amount of his vested accrued SRP benefit on December

31, 1991.

     If a Retained Executive’s employment was terminated prior to

December 31, 1994, either by petitioner without “cause” or by the

executive for “good reason”, the executive would receive his 1991

SRP Benefit plus interest, and a prorated Retention Payment,

computed by multiplying the same base of 1992 salary and STIP

     13
       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.
     14
       In the case of Mr. Richardson, the operative date was
Feb. 29, 1992.
                               - 27 -

award by a multiplier of 2.8 (rather than 3.7) plus 0.005625 for

each week of employment completed after November 1991,15 not to

exceed 3.7.16   “Cause” and “good reason” for purposes of the 1991

Employment Agreements were defined in all material respects as in

the 1990 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 1991 Employment Agreements to the effect that

any reason constituted “good reason” during a specified period.

     Under the 1991 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 1991 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

     15
       For Mr. Francis, the factor equaled 3.0 plus 0.004545 for
each week of employment completed after Jan. 17, 1992; for Mr.
Richardson, 2.8 plus 0.006294 for each week of employment
completed after Mar. 15, 1992.
     16
       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 1991
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 80 percent of the sum of his salary and target
STIP for 1992.
                                - 28 -

1992, multiplied by a factor equal to 2.817 (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 1990 Employment Agreements if he had elected to

terminate employment with petitioner during the June 1992 Window.

A comparison of the Termination Award payable to each Retained

Executive under the 1990 Employment Agreements upon a June 1992

elective termination, with the prorated Retention Payment payable

at the inception of the 1991 Employment Agreements, follows:

     17
          For Mr. Francis, the factor would have been 3.0.
                                - 29 -

                  Termination Award       Retention Payment Payable
                  Payable Under 1990       at Inception of 1991
                 Employment Agreements      Employment Agreements

    Brink              $699,150                    $910,224
    Denny             1,320,000                   1,792,000
    Francis             666,600                     702,000
    Free                646,200                     837,406
    Garrett             948,939                   1,137,780
    Hite                853,314                   1,029,420
    Kurczewski          773,202                     854,000
    Pugh                635,598                     812,122
    Richardson          531,000                     644,448
    Thompson            742,869                     928,428
    Williams            593,205                     758,520

     F.   Mr. Garrett’s Termination

     Effective December 31, 1992, petitioner terminated the

employment of Mr. Garrett without cause and made a prorated

Retention Payment and 1991 SRP Benefit payment in December 1992

under the provisions of his 1991 Employment Agreement.

     G.   The 1992 Amendments

     On December 18, 1992, 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 1991 Employment Agreements

(1992 Amendments).   The 1992 Amendments extended the employment

period provided by the 1991 Employment Agreements by 1 year, from

December 31, 1994, to December 31, 1995, and provided for the

early payment of the Retention Payment and 1991 SRP Benefit, on
                              - 30 -

or before December 31, 1992 (instead of February 1995).   Under

the 1992 Amendments, the Retention Payment payable at yearend

1992 was computed as the portion of the Retention Payment that a

Retained Executive would have received under the 1991 Employment

Agreement if he had terminated his employment for “good reason”,

or if petitioner had terminated his employment without “cause”,

on December 31, 1992.   In addition, the 1992 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 December 31, 1995, the executive was obligated to repay the

entire Retention Payment that he had received in 1992, plus

interest.   Finally, the 1992 Amendments provided that petitioner

would pay the 1991 SRP Benefit plus interest, as provided in the

1991 Employment Agreements, on or before December 31, 1992.    No

“clawback” clause or comparable provision applied to the 1991 SRP

Benefit paid under the 1992 Amendments, in the event a Retained

Executive’s employment ceased prior to the expiration of the

employment period on December 31, 1995.

     Pursuant to the 1991 Employment Agreements, as amended by

the 1992 Amendments, petitioner paid Retention Payments and 1991

SRP Benefits (including interest) to the Retained Executives in

December 1992 as follows:
                                             - 31 -

                                                          SRP
    Retained       Retention      1991 SRP                                     Total
    Executive       Payment       Benefit       Interest          Total       Payment

    Brink         $1,014,453            0             0                 0   $1,014,453
    Denny          1,997,200     $728,977       $62,468          $791,445    2,788,645
    Francis          703,839      358,854        30,751           389,605    1,093,444
    Free             933,297      804,477        68,937           873,414    1,806,711
    Garrett1       1,268,066      406,292        34,816           441,108    1,709,174
    Hite           1,147,298      540,333        46,302           586,635    1,733,933
    Kurczewski       982,997      367,304        31,475           398,779    1,381,776
    Pugh             969,769            0             0                 0      969,769
    Richardson       705,290      426,642        36,560           463,202    1,168,492
    Thompson       1,108,652            0             0                 0    1,108,652
    Williams         845,377      227,380        19,485           246,865    1,092,242

       Total      11,676,238    3,860,259       330,794         4,191,053   15,867,291
1
  Mr. Garrett was terminated by petitioner without “cause”, effective Dec. 31, 1992, and did not
enter into a 1992 Amendment. The figures for him are amounts paid under his 1991 Employment
Agreement as a result of his termination in December 1992.

          The following table compares the Termination Awards payable

under the 1990 Employment Agreements had a Retained Executive

elected to terminate employment with petitioner during the June

1992 Window, the prorated Retention Payment payable at the

inception of the 1991 Employment Agreements, and the prorated

Retention Payment actually paid under the 1992 Employment

Agreements (except with respect to Mr. Garrett) in December 1992.
                    Termination Award           Retention Payment           Retention Payment
 Retained           Payable Under 1990       Payable at Inception of         Paid in Dec. 1992
 Executive         Employment Agreement      1991 Employment Agreement      Under 1992
Amendment

     Brink               $699,150                     $910,224                     $1,014,453
     Denny              1,320,000                    1,792,000                       1,997,200
     Francis              666,600                      702,000                         703,839
     Free                 646,200                      837,406                         933,297
                                                                                   1
     Garrett              948,939                    1,137,780                       1,268,066
     Hite                 853,314                    1,029,420                       1,147,298
     Kurczewski           773,202                      854,000                         982,997
     Pugh                 635,598                      812,122                         969,769
     Richardson           531,000                      644,448                         705,290
     Thompson             742,869                      928,428                       1,108,652
     Williams             593,205                      758,520                         845,377
1
  For Mr. Garrett, this figure was paid under his 1991 Employment Agreement as a
result of his termination in December 1992.
                             - 32 -

     H.   Other 1992 Compensation of Retained Executives

     In 1992, the Retained Executives earned, in addition to the

Retention Payments and 1991 SRP Benefits paid to them in

December, a salary, STIP award, and perquisites.   Also, the 1991

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 January 6, 1993.   Certain Retained Executives were

actively involved in the development of the LTIP arrangements and

received relevant documents, including drafts, during 1992.   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 1992-94, 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 July 1995 for the 1992-94 performance cycle.

A pro rata portion of the LTIP award was generally earned by each

Retained Executive in each year of the performance cycle.18   The

     18
       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 Dec. 31, 1992, was the only Retained Executive who did
not receive an LTIP award in July 1995. All Retained Executives
                                                   (continued...)
                                                  - 33 -

compensation earned in 1992 by each Retained Executive is

summarized in the following table:
                                                                          Interest
Retained                                         Retention2   1991 SRP   on 1991 SRP Perquisites
Executive        Salary      STIP      LTIP1       Payment     Benefit     Benefit    Allowance    Total

    Brink      $216,720   $123,748   $197,400    $466,616            0          0    $89,129    $1,093,613
    Denny       400,000    252,000    441,095     918,648     $728,977    $62,468      28,066    2,831,254
    Francis     156,000     71,136    115,737     351,023      358,854     30,751      33,738    1,117,239
    Free        213,624     97,413    233,926     429,287      804,477     68,937      18,152    1,865,816
                                                                                     3
    Garrett     270,900    154,413          0   1,268,066      406,292     34,816      37,753    2,172,240
    Hite        245,100    139,953    220,030     527,720      540,333     46,302      25,088    1,744,526
    Kurczewski 210,000     119,910    188,278     452,147      367,304     31,475      27,707    1,396,821
    Pugh        207,174    118,090     95,388     480,977            0          0      91,009      992,638
    Richardson 159,833      72,884    120,629     360,251      426,642     36,560      14,845    1,191,644
    Thompson    236,844    135,001    205,127     549,858            0          0      18,918    1,145,748
    Williams    193,500     88,236    148,665     388,846      227,380     19,485      14,180    1,080,292
1
  Prorated (1/3) portion of LTIP paid in 1995 with respect to services rendered during 1992-94,
except with respect to Mr. Pugh, whose LTIP covered 1992 and 1993 only, and is therefore prorated
one-half to 1992.
2
  Portion of the total Retention Payment paid in 1992 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(a) and (h) until
economic performance occurred in 1993, 1994, and 1995.
3
    Includes $20,838 in accrued vacation pay.

          After receiving their Retention Payments in December 1992,

four of the Retained Executives (Messrs. Francis, Free, Pugh, and

Thompson) ceased employment with petitioner before the expiration

on December 31, 1995, of the employment period provided in the

1991 Employment Agreements as modified by the 1992 Amendments.

None of the four was required to repay any portion of the

Retention Payment under the “clawback” clause of the 1992

Amendments, because their employment was not terminated by

petitioner for “cause” or by them for other than “good reason”.

          18
      (...continued)
(except Mr. Garrett) received LTIP awards in July 1995. Mr.
Pugh, terminated effective Apr. 15, 1994, received an LTIP
covering the years 1992 and 1993.
                                           - 34 -

      I.     Retained Executives’ Pre- and Postacquisition
             Compensation

      The total compensation earned by each Retained Executive in

1990 is summarized in the following table:

                                            Restricted   Nonqualified
Retained                      Restricted        Stock      Stock      Perquisite
Executive     Salary     STIP    Stock        Dividend    Options     Allowance      Total

Brink        $56,061   $22,229   $40,969           0     $178,969     $25,872      $324,100
Denny        275,151    93,333    44,620     $18,136      259,200       6,940       697,380
Francis      141,115    37,445    16,490       1,556      160,859      43,709       401,174
Free         150,601    41,803    19,400       8,605      166,602      12,748       399,759
Garrett      191,832    61,170    24,250       6,875      165,788       6,185       456,100
Hite         180,161    59,543    30,070      11,359      212,113      12,132       505,378
Kurczewski   154,054    53,195    26,190      10,716      207,946      10,936       463,038
Pugh         120,853    55,521    10,670       3,528       10,670       3,789       205,031
Richardson   138,863    35,000     9,700       3,586        9,700      21,643       218,492
Thompson     171,851    56,592    22,310       4,899      171,675      71,147       498,474
Williams     102,420    54,062    10,670       3,072       10,670       1,425       182,320

      In 1991, the Retained Executives received various forms of

compensation under the 1990 Employment Agreements, including

stock options, restricted stock and payments in lieu thereof, as

a result of provisions in the 1990 Employment Agreements

triggered by the change in control of petitioner.                      This

compensation totaled, in the aggregate for the 11 Retained

Executives, $8,752,996.           In addition, the Retained Executives

received “gross up” payments in 1991, totaling $2,143,946,

designed to compensate them for any imposition on them of the

section 4999 excise tax on parachute payments with respect to the

aforementioned stock-related payments.
                              - 35 -

     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 1991 Employment Agreements,

the Retained Executives had greater responsibilities, duties, and

authority than they had under the 1990 Employment Agreements.

     In 1992, 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
                               - 36 -

placing an additional burden on the Retained Executives.     Despite

these challenges, petitioner met its business plan for 1992.

IV.   Tax Returns, Notice of Deficiency, and Petition

      On its 1992 Federal income tax return, petitioner claimed a

deduction for $10,384,490 of the aggregate $15,867,291 in

Retention Payments and 1991 SRP Benefits paid to the Retained

Executives in December 1992.   (See supra p. 31 table.)

Petitioner concluded that the $5,482,801 balance of such payments

should be deferred under section 461(a) and (h) until economic

performance occurred in 1993, 1994, and 1995.   In a notice of

deficiency, respondent determined that $7,586,105 of the

deduction claimed in 1992 should be disallowed as excess

parachute payments under section 280G.

      On its 1991 Federal income tax return, petitioner claimed a

deduction under section 162(a) for the $699,027 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 1991 return for

the $1,056,020 it paid to Schneider as reimbursement for

Schneider’s 1991 payment of the loan commitment fees.     In an

amendment to its petition, petitioner asserted entitlement to a

deduction in 1991 for the foregoing amount.   In his answer to the
                                - 37 -

amended petition, respondent denied petitioner’s entitlement to

the deduction.

                                OPINION

I.   Loan Commitment and Legal Fees

     In its amended petition, petitioner asserted entitlement to

a deduction in 1991 for the $1,056,020 that Schneider billed

petitioner that year to reimburse Schneider for paying the loan

commitment fee.19    Also, petitioner claimed a deduction on its

1991 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, e.g.,

INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992); A.E. Staley

Manufacturing Co. & Subs. v. Commissioner, 105 T.C. 166 (1995),

revd. and remanded 119 F.3d 482 (7th Cir. 1997).     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 relate.20    See Anover Realty

     19
          Petitioner paid Schneider’s invoice in 1993.
     20
       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(k)(1). However, sec.
162(k) expressly distinguishes between “amounts properly
allocated to indebtedness and amortized over the term of such
                                                   (continued...)
                                - 38 -

Corp. v. Commissioner, 33 T.C. 671 (1960) (loan acquisition costs

amortized over the life of a loan, regardless of the loan’s

purpose or use of funds); Rev. Rul. 81-160, 1981-1 C.B. 312,

313.21    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 them.22    Thus, the question before us is whether a

     20
      (...continued)
indebtedness” and other stock reacquisition costs, exempting the
former from the prohibition on deductions. Sec.
162(k)(2)(A)(ii); see Fort Howard Corp. v Commissioner, 107 T.C.
187 (1996), supplementing 103 T.C. 345 (1994). We assume the
amounts at issue would be exempted from sec. 162(k)(1)’s
restrictions; in any event, neither party has raised this issue.
     21
       Rev. Rul. 81-160, 1981-1 C.B. 312, 313, 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 Rev. Rul.
            75-172, 1975-1 C.B. 145, and Francis v. Commissioner,
            T.C.M. 1977-170. If the right is not exercised, the
            taxpayer may be entitled to a loss deduction under
            section 165 of the Code when the right expires. See
            Rev. Rul. 71-191, 1971-1 C.B. 77.
     22
       Petitioner asserts the loan costs in question are
deductible in 1991, as opposed to amortizable over a longer
period, because they relate solely to the Bridge Loan, which
lasted fewer than 12 months during 1991. Respondent does not
contest this assertion or otherwise suggest that the payments
                                                   (continued...)
                              - 39 -

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:   (1) 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; (2) 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 (3) 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.

     22
      (...continued)
should be amortized over a period that includes the life of the
Term Loan. We shall therefore treat these payments as deductible
in 1991, if they are deductible by petitioner.
                               - 40 -

     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

“(i.e., SCHNEIDER and the subsidiaries subject to

consolidation)”.    Moreover, the Commitment Letter provides at one
                                    - 41 -

point “Your Company guarantees that it will have this letter

signed by MERLIN GERIN [i.e., MGSA], TELEMECANIQUE [i.e., 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 10 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 $1.125

billion on May 13, 1991, 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.
                              - 42 -

     When the Bridge Loan agreement was signed (on May 30, 1991),

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

30, when the Bridge Loan agreement was signed, until June 12,

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 0.3 percent of

the undisbursed funds.23

     Respondent asserts he is challenging only the commitment fee

incurred by Schneider under the Commitment Letter; i.e., the fee

provided in the Commitment Letter covering the period from

February 18 through June 12, 1991.     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 0.3 percent of undisbursed funds for the

     23
       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.
                               - 43 -

period from May 30 to June 12, 1991, and the $1,056,020 at issue

represents the fee owed from February 18 through June 12, 1991,24

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:

     24
       There has been no suggestion that Schneider and ACQ each
owed separate 0.3 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 $1,056,020
at issue would appear to include payments made under both the
Commitment Letter and Bridge Loan agreement.
                                - 44 -

     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 limitations25 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

     25
       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 Mar. 4, 1991, as
supplemented.
                                 - 45 -

(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, T.C. Memo. 1960-

19.   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, T.C. Memo. 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.
                               - 46 -

Petitioner asserts it is the borrower of the Bridge Loan, as the

successor to ACQ.   Petitioner relies on Rev. Rul. 81-160, 1981-1

C.B. 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.   Rev. Rul. 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 Lohrke v. Commissioner, 48
T.C. 679 (1967), and similar cases for this proposition.26   In

     26
       In all, petitioner cites 14 cases, including Lohrke v.
Commissioner, 48 T.C. 679 (1967); Fall River Gas Appliance Co. v.
Commissioner, 42 T.C. 850, 857-858 (1964), affd. 349 F.2d 515
(1st Cir. 1965); Snow v. Commissioner, 31 T.C. 585 (1958);
Fishing Tackle Prods. Co. v. Commissioner, 27 T.C. 638 (1957);
Dinardo v. Commissioner, 22 T.C. 430 (1954); L. Heller & Son,
Inc. v. Commissioner, 12 T.C. 1109, 1112 (1949); Scruggs-
Vandervoort-Barney, Inc. v. Commissioner, 7 T.C. 779, 785-788
(1946); Robert Gaylord, Inc. v. Commissioner, 41 B.T.A. 1119
(1940); Miller v. Commissioner, 37 B.T.A. 830 (1938); First Natl.
Bank of Skowhegan, Maine v. Commissioner, 35 B.T.A. 876 (1937);
Cepeda v. Commissioner, T.C. Memo. 1993-477, affd. without
published opinion 56 F.3d 1384 (5th Cir. 1995); Coulter Elecs.,
Inc. v. Commissioner, T.C. Memo. 1990-186, affd. without
published opinion 943 F.2d 1318 (11th Cir. 1991); Tex. & Pac. Ry.
Co. v. Commissioner, a Memorandum Opinion of this Court dated
Mar. 25, 1943; and Shasta Water Co. v. Commissioner, a Memorandum
                                                   (continued...)
                              - 47 -

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.

     26
      (...continued)
Opinion of the Board of Tax Appeals dated Feb. 6, 1942.
                              - 48 -

     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 deductibility.27    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 Hood v. Commissioner, 115 T.C.
172, 180-181 (2000), and cases cited therein.    Petitioner has

made no such showing here.   There is no suggestion that Schneider

     27
       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. Hood v. Commissioner, 115 T.C. 172 (2000)
(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.
                              - 49 -

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 Waring Prods. Corp. v. Commissioner, 27
T.C. 921 (1957), 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. at 924.    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.
                              - 50 -

     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 section 23(a)(1), 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. at 929.]

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
                                - 51 -

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 $7,586,105 of the deduction claimed by

petitioner in 1992 with respect to the Retention Payments and

1991 SRP Benefits paid to the Retained Executives in that year,

on the grounds that this amount constituted “excess parachute

payments” within the meaning of section 280G.28    After

concessions, the parties dispute two issues underlying

respondent’s determination.     First, the parties dispute whether

     28
       On brief, respondent concedes that a portion of the 1991
SRP Benefits was not contingent on a change in control within the
meaning of sec. 280G(b)(2)(A)(i) on the grounds that it falls
within a safe harbor provided in sec. 1.280G-1, A-24(c), Proposed
Income Tax Regs., 54 Fed. Reg. 19399 (May 5, 1989), 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 1991 SRP Benefits is deductible by petitioner
under sec. 163 in 1992 and does not constitute a “parachute
payment” within the meaning of sec. 280G. For convenience, we
hereinafter refer to the portion of the 1991 SRP Benefits whose
deductibility remains in dispute as the “disputed 1991 SRP
Benefits” and the portion conceded by respondent as deductible as
the “noncontingent 1991 SRP Benefits”.
                              - 52 -

the Retention Payments and the disputed 1991 SRP Benefits were

“contingent on a change in the ownership or effective control” of

petitioner within the meaning of section 280G(b)(2)(A)(i)(I).

Second, the parties disagree about the extent to which petitioner

has established that the foregoing amounts constitute reasonable

compensation within the meaning of section 280G(b)(4)(A).

     A.   General Requirements of Section 280G

     In general terms, section 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, section 280G(a) disallows a deduction for

any “excess parachute payment”, defined in section 280G(b)(1) 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 section 280G(b)(2)(A) as follows:
                             - 53 -

     (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 3 times the base amount.

     For purposes of clause (ii), payments not treated as
     parachute payments under paragraph (4)(A) * * * [i.e.,
     section 280G(b)(4)(A), 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 section 280G(b)(4)(A):

          (4) Treatment of amounts which taxpayer
     establishes as reasonable compensation.--In the case of
     any payment described in paragraph (2)(A) [i.e.,
     section 280G(b)(2)(A), 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
                              - 54 -

          rendered on or after the date of the change
          described in paragraph (2)(A)(i) * * *

     The parties agree that the Retention Payments and 1991 SRP

Benefits that petitioner deducted and respondent disallowed were

in the nature of compensation to disqualified individuals within

the meaning of section 280G(b)(2)(A).   The parties also agree as

to the “base amount” under section 280G for each Retained

Executive.   The parties disagree, and we must decide, whether the

Retention Payments and the disputed 1991 SRP Benefits were

contingent on a change in ownership or control within the meaning

of section 280G(b)(2)(A)(i) 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 section 280G(b)(4)(A).

     B.   Whether Payments Were Contingent on a Change in Control

     Respondent contends that the Retention Payments and the

disputed 1991 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

     29
       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(b)(4)(B). However, petitioner does not contend that
this provision applies in the instant case.
                               - 55 -

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 section 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. 98-861, at 851 (1984), 1984-3 C.B. (Vol. 2) 1, 105; see

also Cline v. Commissioner, 34 F.3d 480, 486 (7th Cir. 1994)

(adopting foregoing standard), affg. Balch v. Commissioner, 100
T.C. 331 (1993).   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, at 201 (J. Comm. Print 1984).     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
                               - 56 -

involuntarily terminated.   See H. Rept. 98-861, supra at 851,

1984-3 C.B. (Vol. 2) at 105.

     In 1989 the Commissioner issued proposed regulations under

section 280G in question and answer (Q&A) format.30   See sec.

1.280G-1, Proposed Income Tax Regs., 54 Fed. Reg. 19390 (May 5,

1989) (as corrected by 54 Fed. Reg. 25879 (June 20, 1989) and 54

Fed. Reg. 29061 (July 11, 1989)) (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. * * *

     30
       The Commissioner issued revised proposed regulations on
Feb. 20, 2002, and final regulations under sec. 280G on Aug. 4,
2003. See sec. 1.280G-1, Proposed Income Tax Regs., 67 Fed. Reg.
7630 (Feb. 20, 2002); 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 Jan. 1, 2004. See sec. 1.280G-1, Q&A-48,
Proposed Income Tax Regs., 67 Fed. Reg. 7656 (Feb. 20, 2002);
sec. 1.280G-1, Q&A-48, Income Tax Regs. Where, as here, the
change in ownership or control occurred prior to Jan. 1, 2004,
the Commissioner has conceded that taxpayers may rely on the 1989
proposed regulations. See Preamble to sec. 1.280G-1, Income Tax
Regs., 68 Fed. Reg. 45745 (Aug. 4, 2003); see also Preamble to
sec. 1.280G-1, Proposed Income Tax Regs., 67 Fed. Reg. 7630 (Feb.
20, 2002).
                              - 57 -

Sec. 1.280G-1, A-22(a), Proposed Income Tax Regs., 54 Fed. Reg.

19398 (May 5, 1989).   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., 54 Fed. Reg. 19399 (May 5, 1989); 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 regulations.31

While proposed regulations are not competent authority and “carry

no more weight than a position advanced on brief by the

     31
       We note that the revised proposed and final regulations
under sec. 280G (see supra note 28), 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., 67 Fed. Reg. 7630 (Feb. 20, 2002); sec. 1.280G-
1, Q&A-23, Income Tax Regs.
                              - 58 -

respondent”,   F.W. Woolworth Co. v. Commissioner, 54 T.C. 1233,

1265-1266 (1970); see also Houston Oil & Minerals Corp. v.

Commissioner, 92 T.C. 1331, 1338 (1989), affd. 922 F.2d 283 (5th

Cir. 1991); Driggs v. Commissioner, 87 T.C. 759, 771 n.10 (1986);

Miller v. Commissioner, 70 T.C. 448, 460 (1978), respondent has

conceded that petitioner may rely on these proposed regulations

with respect to a change in ownership or control that occurs

prior to January 1, 2004, see Preamble to sec. 1.280G-1, 68 Fed.

Reg. 45745 (Aug. 4, 2003); see also Preamble to sec. 1.280G-1,

Proposed Income Tax Regs., 67 Fed. Reg. 7630 (Feb. 20, 2002).

Even though petitioner is entitled to rely on the version of Q&A-

23 contained in the 1989 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 1991 SRP

Benefits were made “pursuant to” the 1991 Employment Agreements

(as amended in 1992) rather than the 1990 Employment Agreements.

This is not the issue, however.   No one seriously disputes that

the payments in question where made “pursuant to” the 1991

Employment Agreements, as amended in 1992; the dispute concerns

whether the 1991 Employment Agreements were executed “pursuant

to” the 1990 Employment Agreements.    To the extent we can
                                   - 59 -

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 section 280G.       As petitioner observes on brief:

          In the instant case neither Petitioner nor the
     executives were under any legal obligation to enter
     into the 1991 Employment Agreements or the 1992
     Amendments [citations omitted]; they could have gone in
     separate directions from the legal standpoint. * * *
     Thus, the payments necessarily were made “pursuant to”
     the new [i.e., 1991 and 1992] 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 1991 Employment Agreements or the 1992
     Amendments and that the * * * [retention] payments [and
     1991 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
                               - 60 -

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 1991

Employment Agreements--which entitled each to a Retention Payment

and a 1991 SRP Benefit calculated to exceed the value of his

Termination Award and SRP Cashout--because of the 1990 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 1990 Employment

Agreements thus gave them “a significant degree of leverage in

their negotiations with Schneider” over the 1991 Employment

Agreements, respondent argues.   In respondent’s view, “the 1991

Employment Agreements were executed pursuant to the 1990

Employment Agreements, within the meaning of Prop. Treas. Reg. §

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
                              - 61 -

section 280G(b)(2)(A)(i), 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. 98-861, supra at 851, 1984-3 C.B. (Vol. 2) at 105; 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, section 1.280G-1, A-23,

Proposed Income Tax Regs., supra, is no help to petitioner.

     Absent section 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 1991 SRP Benefits were

contingent on a change in control within the meaning of section

280G.   Both this Court and the Court of Appeals for the Seventh

Circuit, to which appeal of this case would ordinarily lie, have
                              - 62 -

endorsed the previously quoted legislative history’s gloss on the

meaning of “contingent on a change in * * * control” as used in

the statute.   See Cline v. Commissioner, 34 F.3d 480 (7th Cir.

1994).   In Cline, the taxpayer entered into a severance agreement

that would have subjected the taxpayer to an excise tax for

parachute payments under section 4999 and his employer to a

deduction disallowance under section 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 at 485.

     On this record, we have no difficulty concluding that the

Retention Payments and the disputed 1991 SRP Benefits “would not

in fact have been made * * * had no change in ownership or

control occurred.”   H. Rept. 98-861, supra at 851, 1984-3 C.B.

(Vol. 2) at 105.   The facts in this case are that Schneider had

no feasible alternative to retaining the Retained Executives in

order to protect its $2.25 billion investment in petitioner, that
                               - 63 -

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 [1990 employment] contract”.

     Schneider ultimately agreed to Retention Payments and 1991

SRP Benefits that exceeded the Termination Awards and SRP

Cashouts payable under the 1990 Employment Agreements if the

Retained Executives had elected to terminate their employment

during the June 1992 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 1991 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 June 1992

Window under the 1990 Employment Agreements.   The role of the

1991 SRP Benefit in replacing the SRP Cashout provided in the

1990 Employment Agreements is similarly transparent.   The 1991

SRP Benefit was in general computed as an amount equal to the SRP
                              - 64 -

Cashout under the 1990 Employment Agreements for a termination as

of December 31, 1991, plus interest to the date paid.

     In sum, the circumstances surrounding the negotiations that

secured the Retained Executives’ rights to the Retention Payments

and 1991 SRP Benefits under the 1991 Employment Agreements, and

the relationship between these payments and the Termination

Awards and SRP Cashouts under the 1990 Employment Agreements,

convince us, and we so find, that the Retention Payments and 1991

SRP Benefits were obtained by the Retained Executives as

consideration in exchange for relinquishing their rights to the

Termination Awards and SRP Cashouts.32   Since the latter payments

were indisputably contingent on a change in control, and they

were relinquished in exchange for the Retention Payments and 1991

SRP Benefits, we are persuaded that the Retention Payments and

the disputed 1991 SRP Benefits would not in fact have been made

absent the change in ownership.   Accordingly, we hold that the

     32
       Although it is true that a Retained Executive’s right to
receive a Termination Award was essentially unconditional (during
the June 1992 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 1991 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
1991 Employment Agreement.
                              - 65 -

Retention Payments and the disputed 1991 SRP Benefits were

contingent on a change in ownership or effective control within

the meaning of section 280G(b)(2)(A).

     Concededly, the Retention Payments and disputed 1991 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(b)(4).   The parties dispute whether the amounts determined

by respondent to be contingent on a change in control constitute

reasonable compensation within the meaning of section

280(G)(b)(4), and it is to that dispute that we now turn.

     C.   Reasonable Compensation--Applicable Test

     Since the Retention Payments and the disputed 1991 SRP

Benefits were contingent on a change in control, they are

parachute payments for purposes of section 280G except to the

extent that petitioner can establish by clear and convincing
                                - 66 -

evidence that any portion of those payments constituted

reasonable compensation for services to be rendered on or after

the change in ownership or control.33     Respondent does not

contest the deductibility as reasonable compensation of any other

payments received by the Retained Executives in 1992.

     In deciding whether petitioner has shown that any portion of

the payments at issue constituted reasonable compensation for

purposes of section 280G(b)(4), we are faced with the threshold

question of the appropriate test or standard to use for assessing

the reasonableness of compensation.      In Cline v. Commissioner,

34 F.3d 480 (7th Cir. 1994), 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 section 280G.

More recently, however, the Court of Appeals rejected the use of

a multifactor test to determine reasonable compensation for

purposes of section 162(a)(1), holding that an “independent

     33
          Sec. 280G(b)(4) provides in part:

          (4) Treatment of amounts which taxpayer
     establishes as reasonable compensation.--In the case of
     any payment described in paragraph (2)(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 (2)(A)(i) * * *
                              - 67 -

investor” test must instead be used.34    Exacto Spring Corp. v.

Commissioner, 196 F.3d 833 (7th Cir. 1999), revg. Heitz v.

Commissioner, T.C. Memo. 1998-220.     As Exacto Spring Corp.

concerned reasonable compensation for purposes of section 162(a),

it is distinguishable from the instant case, and therefore we are

not bound by Golsen v. Commissioner, 54 T.C. 742 (1970), affd.

445 F.2d 985 (10th Cir. 1971), 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

     34
       In Exacto Spring Corp. v. Commissioner, 196 F.3d 833 (7th
Cir. 1999), revg. Heitz v. Commissioner, T.C. Memo. 1998-220, the
Court of Appeals for the Seventh Circuit rejected a multifactor
test for reasonable compensation in a sec. 162(a)(1) 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 section 162(a)(1),
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. at 835. The Court of Appeals held
instead that the independent investor test, which “dissolves the
old [multifactor test] and returns the inquiry to basics”, id. at
838, 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” (i.e., 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. at 838-839.
                              - 68 -

Spring Corp. to circumstances where reasonable compensation must

be measured for purposes of section 280G.   We do not do so,

because we conclude that use of the independent investor test to

determine reasonable compensation for purposes of section 280G

would contravene congressional intent.

     “Reasonable compensation” as that term is used in section

280G(b)(4) is not further defined in the statute.   Neither the

committee nor conference reports accompanying the enactment of

original section 280G in the Deficit Reduction Act of 1984, Pub.

L. 98-369, 98 Stat. 494, provide any guidance regarding how

“reasonable compensation” as employed in section 280G(b)(4) 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, at 204 (J. Comm. Print 1984).]

     An amendment to the statute 2 years after section 280G was

enacted contains direct legislative history concerning the intent

underlying “reasonable compensation”.    In 1986, Congress amended

section 280G(b)(4) to provide, in cases where the taxpayer

establishes that a parachute payment constitutes reasonable

compensation, for different treatment where the reasonable
                              - 69 -

compensation is for services provided before, or after, the date

of the change in ownership or control.   See Tax Reform Act of

1986, Pub. L. 99-514, sec. 1804(j)(2), 100 Stat. 2808.   In

connection with this amendment of the reasonable compensation

provisions of section 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. 99-313, at 919-920 (1986), 1986-3
     C.B. (Vol. 3) 1, 919-920; see also H. Rept. 99-426, at
     902 (1985), 1986-3 C.B. (Vol. 2) 1, 902 (containing
     substantially identical language).]

     The foregoing legislative history convinces us that Congress

intended that reasonable compensation for purposes of section

280G(b)(4) 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 test.35   We accordingly

     35
       Similar factors are also included in Q&A-40 of the
proposed, revised proposed, and final regulations. Sec. 1.280G-
1, Proposed Income Tax Regs., 54 Fed. Reg. 19406 (May 5, 1989),
as corrected by 54 Fed. Reg. 25879 (June 20, 1989) and further
                                                   (continued...)
                              - 70 -

conclude that extension of the Court of Appeals for the Seventh

Circuit’s independent investor test for determining reasonable

compensation under section 162(a) to the golden parachute context

would be contrary to congressional intent.

     Our conclusion is buttressed by consideration of the

differing purposes served by sections 162(a)(1) and 280G(b)(4).

As pointed out by the Court of Appeals in Exacto Spring Corp.,

section 162(a)(1) 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 section 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 arrangements

     35
      (...continued)
corrected by 54 Fed. Reg. 29061 (July 11, 1989); sec. 1.280G-1,
Proposed Income Tax Regs., 67 Fed. Reg. 7654 (Feb. 20, 2002);
sec. 1.280G-1, Income Tax Regs.
                               - 71 -

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, at 199-200 (J. Comm. Print 1984).

In this context, Congress concluded that golden parachutes should

be strongly discouraged by exacting a “tax penalty” if they are

paid.   S. Prt. 98-169 (Vol. 1), at 195 (1984).

     The purpose of section 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
                                - 72 -

parachutes will be satisfactory.    Otherwise, the acquirer would

not proceed with the transaction.36      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

section 280G.37

     Instead, we believe the touchstone of reasonable

compensation that Congress intended for section 280G(b)(4) is, as

phrased in the legislative history, the amount that would be paid

“outside of an acquisition context.”      Staff of Joint Comm. on

     36
       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 17 C.F.R. sec. 229.402(b)(2)(v)(A)(2) (2000).
     37
       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(c)(3)
organization may constitute private inurement in violation of
that section. See, e.g., B.H.W. Anesthesia Found., Inc. v.
Commissioner, 72 T.C. 681 (1979). However, the concept of an
appropriate return on investment would appear inapposite in the
case of a nonprofit enterprise.
                              - 73 -

Taxation, General Explanation of the Revenue Provisions of the

Deficit Reduction Act of 1984, at 204 (J. Comm. Print 1984).    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 section 280G(b)(4).38

     38
       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 1992
would have been satisfactory to a hypothetical independent
investor.
     Based on its audited financial statements, petitioner’s
after-tax return on equity for 1992 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 20 percent in 1992. 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.
                               - 74 -

     D.   Determination of Reasonable Compensation

           1.   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 1991 SRP Benefits constitute reasonable compensation.

Both parties presented expert testimony on the reasonableness of

the Retained Executives’ compensation under the 1991 Employment

Agreements, as amended in 1992.39   Petitioner’s expert, Pearl

Meyer, is an executive compensation consultant with more than 40

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

30 years’ experience.   Both Ms. Meyer and Mr. Rosenbloom authored

opening and rebuttal expert reports and testified at trial.

     39
       Petitioner also argues that the compensation of the
Retained Executives under the 1991 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 June
1992, without providing any future services. Thus, as reflected
in our findings, a significant portion of the Retention Payments
and 1991 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.
                               - 75 -

     We evaluate the opinions of experts in light of the

qualifications of each expert and all other evidence in the

record.   Estate of Christ v. Commissioner, 480 F.2d 171, 174 (9th

Cir. 1973), affg. 54 T.C. 493 (1970); Parker v. Commissioner, 86
T.C. 547, 561 (1986).    We have broad discretion to evaluate “‘the

overall cogency of each expert’s analysis.’”      Sammons v.

Commissioner, 838 F.2d 330, 333 (9th Cir. 1988) (quoting Ebben v.

Commissioner, 783 F.2d 906, 909 (9th Cir. 1986), affg. in part

revg. and remanding in part T.C. Memo. 1983-200), affg. in part,

revg. in part T.C. Memo. 1986-318.      We are not bound by the

opinion of an expert when that opinion is contrary to our

judgment.   Orth v. Commissioner, 813 F.2d 837, 842 (7th Cir.

1987), affg. Lio v. Commissioner, 85 T.C. 56 (1985); Estate of

Kreis v. Commissioner, 227 F.2d 753, 755 (6th Cir. 1955), affg.

T.C. Memo. 1954-139.    While we may accept the opinion of an

expert in its entirety, Buffalo Tool & Die Manufacturing Co. v.

Commissioner, 74 T.C. 441, 452 (1980), we may be selective in the

use of any portion of such an opinion, Parker v. Commissioner,

supra at 562.

     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
                              - 76 -

Executives before and after the acquisition by Schneider, as well

as a comparison of the Retained Executives’ compensation paid in

1992 with compensation paid in 1992 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 1992.   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 250 to 1,000 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

section 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 1986

amendment of section 280G(b)(4) specifically endorses the use of

“similarly situated employees” working for “comparable employers”
                               - 77 -

as a means of determining reasonable compensation.    S. Rept. 99-

313, supra at 919-920, 1986-3 C.B. (Vol. 3) at 919-920; H. Rept.

99-426, supra at 902, 1986-3 C.B. (Vol. 2) at 902.    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 1,000 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 22 arrangements examined by Ms.

Meyer, only one involved calendar year 1992.    Consequently, the

relevance of Ms. Meyer’s findings under this approach to the

ascertainment of reasonable compensation in 1992 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
                              - 78 -

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.

          2.   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 compensation.40   The legislative history

of section 280G makes clear that one factor to be considered in

determining reasonable compensation for purposes of section

280G(b)(4) is “compensation * * * paid to the disqualified

     40
       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 48 percent between
1988 and 1992, which she found unremarkable. In reaching this
figure, however, Ms. Meyer omitted entirely the Retention
Payments and 1991 SRP Benefits paid to the Retained Executives in
1992, 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 1992. Accordingly, we accord no weight to Ms.
Meyer’s attempt at an historical analysis of the Retained
Executives’ compensation.
                              - 79 -

individual in prior [i.e., to the change in control] years”.      S.

Rept. 99-313, supra at 919-920, 1986-3 C.B. (Vol. 3) at 919-920;

H. Rept. 99-426, supra at 920, 1986-3 C.B. (Vol. 2) at 902.

     Mr. Rosenbloom analyzed the increases in the Retained

Executives’ compensation from 1990 to 1992 and concluded that the

increases ranged from 159 to 537 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 1990 and 1992.   On the basis of the

compensation which it has been stipulated the Retained Executives

earned, a comparison of 1990 and 1992 compensation is possible,

and the results are comparable to Mr. Rosenbloom’s.41   Without

treating any portion of the LTIP payout as earned in 1992

(notwithstanding that the payout was determined with respect to

services in 1992, 1993, and 1994), the Retained Executives’ 1990

     41
       Mr. Rosenbloom’s computation of the increase from 1990 to
1992 is conservative in one important respect, because he
includes in 1992 compensation only 25 percent of the Retention
Payments and 1991 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 1991 SRP
Benefits, were earned by the Retained Executives in 1992. When
the stipulated amounts are added to 1992 compensation, the
increase over 1990 is augmented to that extent.
                             - 80 -

and 1992 compensation, and the percentage increase therein, is as

follows:

     Retained             1990            1992       Percentage
     Executive        Compensation    Compensation    Increase

     Brink              $324,100         $896,213        177
     Denny               697,380        2,390,159        243
     Francis             401,174        1,001,502        150
     Free                399,759        1,631,890        308
     Garrett             456,100        2,172,240        376
     Hite                505,378        1,524,496        202
     Kurczewski          463,038        1,208,543        161
     Pugh                205,031          897,250        338
     Richardson          218,492        1,071,015        390
     Thompson            498,474          940,621         89
     Williams            182,320          931,627        411

If the Retained Executives are treated as having earned one-third

of their LTIP payout in 1992 (which we elsewhere conclude is

appropriate when measuring reasonable compensation for purposes

of section 280G), the percentage increase in their compensation

from 1990 to 1992 is as follows:
                                 - 81 -

     Retained                1990             1992           Percentage
     Executive           Compensation     Compensation1        Increase

     Brink                 $324,100        $1,093,613           237
     Denny                  697,380          2,831,254          306
     Francis                401,174          1,117,239          178
     Free                   399,759          1,865,816          367
                                            2
     Garrett                456,100           2,172,240         376
     Hite                   505,378          1,744,526          245
     Kurczewski             463,038           1,396,821         202
                                               3
     Pugh                   205,031              992,638        384
     Richardson             218,492           1,191,644         445
     Thompson               498,474           1,145,748         130
     Williams               182,320           1,080,292         493
     1
          Includes 1/3 of LTIP payout.
     2
          Mr. Garrett did not receive an LTIP payout.
     3
          Includes 1/2 of LTIP payout.

     In developing a comparison of pre- and postacquisition

compensation, we believe that 1990 is the most appropriate

measure of preacquisition compensation because in 1991 the

Retained Executives received $10,896,942 in compensation that was

triggered by the acquisition.42       Thus, 1991 compensation does not

reflect preacquisition levels of compensation.         The dramatic

increase between the 1990 (preacquisition) compensation and 1992

(postacquisition) compensation of the Retained Executives

provides support for the conclusion that the Retention Payments

and 1991 SRP Benefits earned in 1992 were not reasonable

compensation for purposes of section 280G(b)(4).           Petitioner has

     42
       This figure consists of $8,752,996 in stock-related
payments under the 1990 Employment Agreements, plus $2,143,946 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.
                                - 82 -

not shown that any comparable executives, outside an acquisition

context, received similar increases in their compensation over

this period.

            3.   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 1992

through 1995 in her opening report; in her rebuttal report she

considered data for 1992 only.    Mr. Rosenbloom generally

considered such data for 1992 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 1991 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
                              - 83 -

covered by the Agreements (i.e., late 1991 through 1995), 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 4 years of services;43 thus, the

Retention Payments should be combined with the other compensation

earned by the Retained Executives for these 4 years of services

(e.g., 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.   Section 280G(b)(4) 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(b)(4)(A).

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

     43
       We note that the Retention Payments paid in December 1992
were subject to a “clawback” provision if a Retained Executive
failed to serve out the 4-year term of his 1991 Employment
Agreement (as amended). However, the 1991 SRP Benefits paid in
December 1992 were not subject to any similar forfeiture.
                              - 84 -

the compensation paid with respect to the services rendered in a

given taxable year.

     In December 1992, petitioner paid Retention Payments and

1991 SRP Benefits to the Retained Executives totaling

$15,867,291.   Of this amount, petitioner deducted $10,384,490--

consisting of the total44 of the 1991 SRP Benefits payments and

related interest paid to the Retained Executives in 1992

($4,191,053), plus that portion of the aggregate Retention

Payments paid in 1992 with respect to which petitioner took the

position that “economic performance” (within the meaning of

section 461(h)) had occurred in 1992 ($6,193,437).45    The

remaining $5,482,801 in Retention Payments paid in 1992 was

deferred, according to petitioner, pursuant to section 461(h) and

deducted ratably in petitioner’s 1993, 1994, and 1995 taxable

years.

     Having thus taken the position that $10,384,490 in Retention

Payments and 1991 SRP Benefits was earned by the Retained

Executives in 1992, it is incumbent upon petitioner in our view

to demonstrate clearly and convincingly that these amounts, when

     44
       Petitioner contends that the entire 1991 SRP Benefits
payment (plus interest) was deductible when paid in 1992 because,
unlike the Retention Payments, such amount was not subject to
clawback.
     45
       Petitioner has also stipulated that the amount of the
Retention Payments and 1991 SRP Benefits that was earned by the
Retained Executives in 1992 was $10,384,490.
                               - 85 -

added to the other compensation earned by the Retained Executives

in that year, constituted reasonable compensation for the

services rendered in 1992.46   Ms. Meyer’s opening report, which

compares the Retained Executives’ total compensation47 (including

Retention Payments) over the period 1992-95 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 1992.   Ms. Meyer’s 4-year

aggregate approach effectively treats the Retention Payments and

1991 SRP Benefits as having been earned ratably over 4 years,48

when in fact they were lump-sum payments totaling $15,867,291

made in 1992, more than 65 percent of which petitioner treated in

its return as earned by the Retained Executives in 1992.     Nothing

     46
       The parties generally disregard the fact that some
portion of the Retention Payments is theoretically allocable to
the 46 days in 1991 covered by the 1991 Employment Agreements.
As we do not consider this allocation material, we shall likewise
disregard it.
     47
       Ms. Meyer excludes from the Retained Executives’
compensation any portion of the 1991 SRP Benefits that was paid
to them in December 1992. As more fully discussed infra, we do
not agree that such amounts are appropriately excluded from 1992
compensation. Moreover, we believe Ms. Meyer’s treatment of the
1991 SRP Benefits conflicts with petitioner’s stipulation that
they were earned in 1992.
     48
       More precisely, Ms. Meyer did not treat the 1991 SRP
Benefits as having been earned ratably over the period. Instead,
she took the position that the payment of the 1991 SRP Benefits
in 1992 should be disregarded in determining whether the
challenged payments to the Retained Executives constituted
reasonable compensation. See supra note 47.
                                - 86 -

in Ms. Meyer’s opening report suggests how much compensation, of

the total amount calculated as reasonable for the 1992-94 period,

was reasonable for the services rendered in 1992.     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 1991 SRP Benefits that petitioner treated

as earned in 1992 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 1992

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 section

280G(b)(4) 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 11 Retained Executives is reasonable in comparison to the
                             - 87 -

total compensation of a comparable group of executives, it should

be treated as reasonable for purposes of section 280G(b)(4) even

though the individual compensation of certain Retained Executives

was unreasonable.49

     We conclude that petitioner’s and Ms. Meyer’s position is

unsupportable as a matter of law.   First, the legislative history

of section 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. 99-313,
     supra at 919-920, 1986-3 C.B. (Vol. 3) at 919-920; see
     also H. Rept. 99-426, supra at 902, 1986-3 C.B. (Vol.
     2) at 902 (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 section 162(a)(1) on an

individual rather than group basis.   See, e.g., Hendricks

Furniture, Inc. v. Commissioner, T.C. Memo. 1988-133; RTS Inv.

     49
       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.
                             - 88 -

Corp. v. Commissioner, T.C. Memo. 1987-98, affd. 877 F.2d 647

(8th Cir. 1989), affd. without published opinion sub nom. Hilt v.

Commissioner, 899 F.2d 1225 (9th Cir. 1990); Schanchrist Foods,

Inc. v. Commissioner, T.C. Memo. 1977-129; William E. Davis &

Sons, Inc. v. Commissioner, T.C. Memo. 1975-229; Natl.

Underwriters, Inc. v. Commissioner, T.C. Memo. 1974-14.      The

legislative history and the authorities under section 162(a)(1)

persuade us that reasonable compensation for purposes of section

280G(b)(4) 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’ 1992 Compensation

     Under a comparables approach, the initial step in assessing

whether the Retention Payments and disputed 1991 SRP Benefits

deducted by petitioner in 1992 constitute reasonable compensation

involves a determination of the compensation earned by the

Retained Executives for 1992 other than the challenged payments.

The amounts received by the Retained Executives as base salary

and STIP for 1992 are undisputed herein.   However, the parties

and their experts disagree on how to account for certain other

compensatory payments related to 1992, including perquisites,

LTIP compensation, and the 1991 SRP Benefits payments.

     As noted, both experts obtained compensation information for

comparable executives from SEC proxy filings.   Their
                                - 89 -

disagreements concerning the 1992 compensation of the Retained

Executives in the main concern the appropriate adjustments to be

made to the Retained Executives’ 1992 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 $50,000 or 10 percent of

salary and bonus,50 Ms. Meyer took the position that perquisites

of the Retained Executives should be excluded from their 1992

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’ 1992

compensation, regardless of amounts.     We agree with Ms. Meyer

that the perquisites of the Retained Executives for 1992 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

compared.51    However, we find that Ms. Meyer erred in

     50
          See 17 C.F.R. sec. 229.402(b)(2)(iii)(C)(1) (1993).
     51
       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 $77,371 in moving
                                                   (continued...)
                                 - 90 -

disregarding all perquisites for all Retained Executives.     Two of

the Retained Executives-–Mr. Brink and Mr. Francis-–received

perquisites in 1992 that, according to petitioner’s own

calculations, exceeded the SEC reporting thresholds.     The 1992

perquisites of Mr. Brink ($89,129) and of Mr. Francis ($33,738)

exceeded 10 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 1992 compensation

for purposes of comparing it to the compensation of other

executives.

                  (ii)   LTIP Compensation

     Petitioner made payments totaling $5,803,439 to the Retained

Executives in July 1995, pursuant to the LTIP arrangements, with

respect to petitioner’s financial performance for the years 1992,

1993, and 1994.52    In her opening report, Ms. Meyer included the

LTIP payouts in the Retained Executives’ compensation for the 4-

year period 1992-95.     However, in measuring the Retained

Executives’ 1992 compensation in her rebuttal report, Ms. Meyer

took the position that no portion of the LTIP payouts should be

included in 1992 compensation because such amounts were not

     51
      (...continued)
expenses paid to Mr. Pugh in 1992. Mr. Pugh’s remaining 1992
perquisites fall below SEC reporting thresholds.
     52
       Mr. Garrett did not receive an LTIP award, and Mr. Pugh’s
award covered only 1992 and 1993. See supra note 18.
                                - 91 -

vested until the end of 1994 and not paid until 1995.       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 1992

would be inconsistent with the conventions under which the

compensation of comparable executives was disclosed.    Mr.

Rosenbloom took the position that a ratable portion (i.e., 33

percent) of a Retained Executive’s LTIP award should be treated

as compensation earned in 1992.

     For purposes of establishing reasonable compensation under

section 280G(b)(4), 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 1992.54

Further, Ms. Meyer’s contention that the LTIP award was not

vested until the completion of the 1992-94 performance period is

belied by the evidence in this case.     Mr. Pugh, whose employment

was terminated effective April 15, 1994, received an LTIP based

on his services in 1992 and 1993.    Moreover, Ms. Meyer’s

     53
          See 17 C.F.R. sec. 229.402(b)(2)(iv)(C) (1993).
     54
       Although the Retained Executives were not advised of the
final terms of the LTIP until early 1993, their rights to an LTIP
award were secured in the 1991 Employment Agreements, and certain
of the Retained Executives participated in the development of the
LTIP arrangements during 1992.
                               - 92 -

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’ 1992

compensation, while at the same time she includes in the 1992

compensation of her purportedly comparable executives any long-

term incentive compensation payouts to them that happen to be

disclosed for 1992.    Such amounts are included in the 1992

compensation of her purportedly comparable executives even where

they represent compensation for multiple years.55   Thus, the

version of conformity to SEC disclosure conventions that Ms.

Meyer advocates systematically inflates the 1992 compensation of

her purported comparables in relation to her computation of the

1992 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 section 280G(b)(4) in this case must

take some account of the substantial LTIP payouts made to the

Retained Executives.    Mr. Rosenbloom’s determination to treat the

     55
       For example, Ms. Meyer includes in the 1992 compensation
of comparable executives Bielenski and Baisley, of W.W. Grainger,
Inc., their long-term incentive compensation payouts in 1992 of
$71,300 and $56,300, respectively, even though that company’s
proxy materials in the record disclose that the payouts covered 3
fiscal years (1990-92).
                              - 93 -

LTIP payouts as earned ratably over the 3-year period covered by

the LTIP arrangements is reasonable, and we accept it.56   We

accordingly shall treat the Retained Executives’ 1992

compensation for purposes of determining its reasonableness in

this case as including 33 percent of the LTIP payout covering the

period 1992-94, except in the case of Mr. Pugh, whose LTIP payout

covered only 1992 and 1993 and is therefore allocated 50 percent

to 1992.

               (iii) 1991 SRP Benefits

     Petitioner made payments of 1991 SRP Benefits and related

interest totaling $4,191,053 to the Retained Executives in

December 1992, under the terms of the 1991 Employment Agreements

as amended in 1992.   Petitioner deducted these amounts in 1992

and takes the position herein that these amounts were fully

earned by the Retained Executives in 1992 because, unlike the

Retention Payments, they were not subject to clawback if a

     56
       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’ 1992 compensation, it should
be 20, not 33, percent, because the LTIP arrangements weighted
petitioner’s financial performance in 1992, 1993, and 1994 at 20,
30, and 50 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.
                              - 94 -

Retained Executive failed to complete the 4-year term of

employment provided in the 1991 Employment Agreements as amended.

     Ms. Meyer, for purposes of measuring the Retained

Executives’ 1992 compensation to test it for reasonableness, took

a position similar to her position regarding the LTIP payouts;

namely, that the 1991 SRP Benefits should be disregarded.    Ms.

Meyer would disregard this aggregate payment exceeding $4

million, made to the Retained Executives in 1992, on the grounds

that the 1991 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 1991 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

1991 SRP Benefits identically to the Retention Payments,

including a pro rata portion of the 1992 payment based on the

number of years during the 1992-95 period that a Retained

Executive remained employed with petitioner.

     We conclude that neither expert has satisfactorily accounted

for the 1991 SRP Benefits for purposes of assessing the

reasonableness of the compensation of the Retained Executives.
                                - 95 -

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 1992 in anticipation of an increase in Federal income

tax rates in 1993, 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 1992

in the form of the 1991 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

1991 SRP Benefits, which ranged from 1.6 to more than 4 times a

Retained Executive’s 1992 base salary, were extraordinary in

circumstance and amount.   Any attempt to demonstrate the

reasonableness of the Retained Executives’ 1992 compensation that

simply disregards the 1991 SRP Benefits falls far short of “clear

and convincing”, in our view.
                              - 96 -

     While it is possible that some portion of the 1991 SRP

Benefits is theoretically allocable to services provided in years

other than 1992, petitioner has made no showing in this regard

and instead has stipulated that the 1991 SRP Benefits were

“earned” by the Retained Executives in 1992.   In addition, the

1991 SRP Benefits were paid in 1992 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 1991 SRP Benefits are allocable

in full to the Retained Executives’ 1992 compensation.57

     As earlier noted, supra note 28, respondent has conceded

that a portion of the 1991 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., 54 Fed. Reg.

19399 (May 5, 1989).   Respondent maintains his position that the

remainder of the 1991 SRP Benefits not excluded from parachute

     57
       As noted, we are also unpersuaded by Mr. Rosenbloom’s
position that the 1991 SRP Benefits should be allocated ratably
over the years in the period 1992-95 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 1991 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
1991 SRP Benefits were “earned” in 1992.
                             - 97 -

payment treatment under Q&A-24(c) are parachute payments.58    The

total 1991 SRP Benefits paid to each Retained Executive,59 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:

                  1991 SRP     Noncontingent
                  Benefit         Amount       Remainder

     Denny        $728,977      $728,977              0
     Francis       358,854       118,422       $249,432
     Free          804,477       596,260        208,217
     Garrett       406,292       166,580        239,712
     Hite          540,333       270,166        270,167
     Kurczewski    367,304       143,249        224,055
     Richardson    426,642             0        426,642
     Williams      227,380             0        227,380

     Because we conclude that the 1991 SRP Benefits should be

treated as compensation earned by the Retained Executives in

1992, those portions of the 1991 SRP Benefits conceded by

respondent as excluded from parachute payment treatment under

Q&A-24(c) are treated as part of the Retained Executives’ 1992

compensation for purposes of assessing whether petitioner has

shown that the Retention Payments and the disputed 1991 SRP

     58
        The parties have also stipulated that the amounts
denominated as “interest” paid with respect to the 1991 SRP
Benefits are deductible by petitioner in 1992 pursuant to sec.
163(a).
     59
       Messrs. Brink, Pugh, and Thompson did not receive any
1991 SRP Benefits.
                                               - 98 -

Benefits constitute reasonable compensation for purposes of

section 280G(b)(4).

                        (iv)      Summary

       Applying the foregoing determinations regarding the

appropriate measure of the Retained Executives’ 1992 compensation

produces the amounts of 1992 compensation (excluding the

Retention Payments and the disputed 1991 SRP Benefits) summarized

in the following table:
Retained                                       Noncontingent
Executive     Salary       STIP       LTIP1     1991 SRP Benefit   Perquisites     Total

Brink        $216,720    $123,748   $197,400            0          $89,129        $626,997
Denny         400,000    252,000     441,095      $728,977               0       1,822,072
Francis       156,000     71,136     115,737       118,422          33,738         495,033
Free          213,624     97,413     233,926       596,260               0       1,141,223
Garrett       270,900    154,413           0       166,580               0         591,893
Hite          245,100    139,953     220,030       270,166               0         875,249
Kurczewski    210,000    119,910     188,278       143,249               0         661,437
Pugh          207,174    118,090      95,388             0               0         420,652
Richardson    159,833     72,884     120,629             0               0         353,346
Thompson      236,844    135,001     205,127             0               0         576,972
Williams      193,500     88,236     148,665             0               0         430,401
1
  Prorated (1/3) portion of LTIP paid in 1995 with respect to services rendered during 1992-94,
except for Mr. Pugh, whose proration for 1992 is one-half, because he rendered services only in
1992 and 1993.

                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 1992.
                               - 99 -

                 (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 18 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 10 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
                              - 100 -

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 section 280G(b)(4) specifically endorses

the use of “similarly situated employees” working for “comparable

employers” as a means of determining reasonable compensation.     S.

Rept. 99-313, supra at 919-920, 1986-3 C.B. (Vol. 3) at 919-920;

H. Rept. 99-426, supra at 902, 1986-3 C.B. (Vol. 2) at 902.      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 10 companies common to both experts’

lists.60   We reject as comparables the four companies noted above

     60
       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
1992 proxy materials in the record are not comparable in format
to the other companies.
                               - 101 -

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 Corp.61

               (ii)    Selection of Comparable Executives and Their
                       1992 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

     61
       The fourth, Raychem Corp., is disregarded because its
1992 proxy materials in the record are not comparable in format
to the other companies’.
                              - 102 -

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 1992 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 plans.62

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.

     62
       Respondent even concedes on brief that some of Mr.
Rosenbloom’s methodology in valuing compensation merits
criticism.
                               - 103 -

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
                              - 104 -

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
                             - 105 -

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.
                                - 106 -

          f.   Reasonable Compensation Established for Each
               Retained Executive

     Having concluded that 13 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

1992 compensation is more reliable than Mr. Rosenbloom’s, and

that reasonable compensation in 1992 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 1992.

               (i)   Mr. Brink

     Ms. Meyer identified 13 executives in her rebuttal report

that she considered comparable to Mr. Brink in 1992.   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 1992 are not comparable to the remaining companies,

having been made prior to October 1992 regulatory changes

governing disclosure formats.    We conclude that the 10 remaining

executives are comparable.

     For the reasons previously outlined, we use Ms. Meyer’s

computation of their 1992 compensation.   However, one significant
                               - 107 -

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 1992

compensation because the payout occurred in 1992, 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 $778,790 payout in 1993, paid with

respect to 5 years of services including 1992.   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 1992 compensation of the comparable

executives to do so, as described in greater detail in the

footnotes to the following table, which summarizes the 1992

compensation of the executives determined to be comparable to Mr.

Brink.
                                 - 108 -
                                       1992 Compensation
               Executive/Title           Per Ms. Meyer

             Nagy, SVP & CFO,              $450,000
              General Signal Corp.

             Babcock, VP-Finance,           437,000
              Thomas & Betts Corp.
                                            1
             Galvin, SVP Finance &           473,300
              Controller, Emerson
              Elec. Co.

             Rowell, EVP-CFO,               783,500
              Hubbell, Inc.
                                            2
             Roell, VP-CFO,                     537,200
              Johnson Controls, Inc.

             Cross, SVP-Finance,            603,500
              Cooper Indus., Inc.
                                            3
             Bielinski, VP & CFO,               594,800
              W.W. Grainger, Inc.

             Savidge, EVP-CFO,              400,700
              AMP, Inc.

             Davis, CFO, Secy,              215,900
              Baldor Elec. Co.

             Allender, SVP & CFO,           519,000
              Danaher Corp.
     1
       Added to the total compensation computed by Ms. Meyer is 20 percent
     (or approximately $155,800) of a long-term incentive compensation plan
     payout in 1993 of $778,790, which the Emerson Elec. Co. proxy materials
     in the record disclose was paid with respect to a 5-year performance
     period that included 1992.
     2
       Ms. Meyer’s figure includes a long-term incentive compensation plan
     payout of $18,700 which, according to the Johnson Controls, Inc., proxy
     materials in the record, is the 1992 portion of a long-term incentive
     performance award covering the period 1992-94.
     3
       Excludes $47,800 of the total compensation computed by Ms. Meyer,
     representing 67 percent of a $71,300 long-term incentive compensation
     plan payout in 1992 that Ms. Meyer included in full, since the 1992
     payout, according to the W.W. Grainger, Inc., proxy materials in the
     record, covered the company’s 3 fiscal years 1990-92.

The 90th percentile of this range of compensation is $621,500.

Accordingly, reasonable compensation for Mr. Brink in 1992 would

have been an amount not exceeding $621,500.               Mr. Brink’s 1992
                                - 109 -

compensation, excluding the Retention Payment,63 was $626,997.

Consequently, petitioner has failed to show that any portion of

the Retention Payment deducted with respect to Mr. Brink in 1992

constituted reasonable compensation for purposes of section

280G(b)(4).

                 (ii)   Mr. Denny

     Ms. Meyer identified 10 executives in her rebuttal report

that she considered comparable to Mr. Denny in 1992.    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

comparable.64

     63
       Respondent concedes that the entire amount of the 1991
SRP Benefit paid to Mr. Brink and deducted by petitioner in 1992
was not contingent on a change in control under Q&A-24(c) of sec.
1.280G-1, Proposed Income Tax Regs., 54 Fed. Reg. 19399 (May 5,
1989).
     64
       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 1992 compensation of the
executives treated by Mr. Rosenbloom as comparable to Mr. Denny,
that figure would be higher than the 90th percentile of the 1992
compensation of the executives treated as comparable by Ms.
Meyer.
                              - 110 -

     For the reasons previously outlined, we use Ms. Meyer’s

computation of their 1992 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 1992 compensation of Mr. Suter of Emerson Electric Co.

and Mr. Davis of Baldor Electric Co. to include in their 1992

compensation a ratable portion of long-term incentive

compensation paid to them in 1993.   The following table

summarizes the 1992 compensation of the executives determined to

be comparable to Mr. Denny.
                                   - 111 -
                                             1992 Compensation
               Executive/Title                 Per Ms. Meyer

             Moore, Pres., Elec.              $1,211,400
              Div., Thomas &
              Betts Corp.
                                               1
             Suter, Pres. & COO,                1,278,800
              Emerson Elec. Co.

             Bonsignore, EVP &                 1,135,700
              COO, Honeywell, Inc.

             Moore, EVP & COO,                 1,159,000
              Honeywell, Inc.

             Riley, Pres. & COO,                   768,900
              Cooper Indus.,Inc.

             Clark, EVP, Inds.,                    645,700
              Westinghouse Elec. Corp.
                                                   2
             Davis, EVP & COO,                      832,100
              Rockwell Intl. Corp.

             Marley, Pres. & COO,                  570,300
              AMP, Inc.

             Qualls, Pres. & COO,                  511,900
              Baldor Elec. Co.
     1
      Added to the total compensation computed by Ms. Meyer is 20
     percent (or approximately $378,800) of a long-term incentive
     compensation plan payout in 1993 of $1,894,043, which the Emerson
     Elec. Co. proxy materials in the record disclose was paid with
     respect to a 5-year performance period that included 1992.
     2
      Added to the total compensation computed by Ms. Meyer is 33
     percent (or approximately $135,200) of a long-term incentive
     compensation plan payout in 1993 of $409,605, which the Rockwell
     Intl. Corp. proxy materials in the record disclose was paid with
     respect to a 3-year performance period that included 1992.

The 90th percentile of this range of compensation is $1,224,880.

Accordingly, reasonable compensation for Mr. Denny in 1992 would

have been an amount not exceeding $1,224,880.            Mr. Denny’s 1992

compensation, excluding the Retention Payment and disputed 1991

SRP Benefit, was $1,822,072.        Consequently, petitioner has failed

to show that any portion of the Retention Payment and disputed

1991 SRP Benefit deducted with respect to Mr. Denny in 1992
                               - 112 -

constituted reasonable compensation for purposes of section

280G(b)(4).

                 (iii) Mr. Kurczewski

     Ms. Meyer identified six executives in her rebuttal report

that she considered comparable to Mr. Kurczewski in 1992.    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 1992 compensation.    However, an adjustment

is required to correct Ms. Meyer’s computation of the 1992

compensation of Mr. Baisley of W.W. Grainger, Inc.    Ms. Meyer

included in Mr. Baisley’s 1992 compensation the entire amount of

a long-term incentive compensation payout made in 1992, even

though the payout covered services rendered in 3 fiscal years

(1990-92).    Accordingly, a ratable portion of the payout is

removed from 1992 compensation, as described in greater detail in

a footnote to the following table, which summarizes the 1992

compensation of the executives determined to be comparable to Mr.

Kurczewski.
                                 - 113 -
                                            1992 Compensation
              Executive/Title                 Per Ms. Meyer
                                              1
             Baisley, VP, GC,                  $468,100
              W.W. Grainger, Inc.

             Davies, GC, Secy,                    292,400
              Hubell, Inc.

             Smith, VP, GC & Secy                 270,300
              General Signal Corp.

             Grayson, VP, GC,                     952,700
              Honeywell, Inc.
                                                  2
             Kennedy, VP, GC & Secy                475,900
              Johnson Controls, Inc.
     1
      Excludes $37,800 of the total compensation computed by Ms.
     Meyer, representing 67 percent of a $56,300 long-term incentive
     compensation plan payout in 1992 that Ms. Meyer included in full,
     since the 1992 payout, according to the W.W. Grainger, Inc., proxy
     materials in the record, covered the company’s 3 fiscal years
     1990-92.
     2
      Ms. Meyer’s figure includes a long-term incentive compensation
     plan payout of $31,100 which, according to the Johnson Controls,
     Inc., proxy materials in the record, is the 1992 portion of a
     long-term incentive performance award covering the period 1992-94.

The 90th percentile of this range of compensation is $761,980.

Accordingly, reasonable compensation for Mr. Kurczewski in 1992

would have been an amount not exceeding $761,980.            Mr.

Kurczewski’s 1992 compensation, excluding the Retention Payment

and disputed 1991 SRP Benefit, was $661,437.             Because reasonable

compensation for Mr. Kurczewski in 1992 exceeded his 1992

compensation (exclusive of the Retention Payment and disputed

1991 SRP Benefit) by $100,543, this excess constitutes the amount

of Mr. Kurczewski’s Retention Payment and disputed 1991 SRP

Benefit that petitioner has shown by clear and convincing

evidence was reasonable compensation in 1992 for purposes of

section 280G(b)(4).
                               - 114 -

               (iv) Messrs. Garrett, Richardson, Thompson, and
                    Williams

     Ms. Meyer identified 17 executives in her rebuttal report

that she considered comparable to petitioner’s heads of operating

divisions; namely, Messrs. Garrett, Richardson, Thompson, and

Williams, in 1992.   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 1992 in the proxy disclosure

materials in the record conflict with Ms. Meyer’s description of

their duties in 1992; Messrs. Jeney, Dundon, and Scherzi of

Magnetek, Inc., because the proxy disclosures of that company for

1992 are not comparable to the remaining companies, having been

made prior to October 1992 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.
                               - 115 -

       We conclude that the seven remaining executives are

comparable.    For the reasons previously outlined, we use Ms.

Meyer’s computation of their 1992 compensation.    However, an

adjustment is required to correct Ms. Meyer’s computation of the

1992 compensation of Mr. Keyser of W.W. Grainger, Inc.    Ms. Meyer

included in Mr. Keyser’s 1992 compensation the entire amount of a

long-term incentive compensation payout made in 1992, even though

the payment covered services rendered in 3 fiscal years (1990-

92).    Accordingly, a ratable portion of the payout is removed

from 1992 compensation, as described in greater detail in a

footnote to the following table, which summarizes the 1992

compensation of the executives determined to be comparable to

petitioner’s heads of operating divisions.
                                   - 116 -
                                              1992 Compensation
              Executive/Title                   Per Ms. Meyer

             Bonke, Group VP,                    $393,000
              General Signal Corp.

             Pluff, Group VP,                     416,200
              Hubbell, Inc.

             Paquette, Div. Pres.,                327,500
              Thomas & Betts Corp.

             Pileggi, Div. Pres.,                 262,600
              Thomas & Betts Corp.

             Chenoweth, Sr. Corp.                 712,600
              VP-Intl., Honeywell, Inc.
                                                  1
             Keyser, EVP, W.W.                     829,500
              Grainger, Inc.

             Hassan, VP-Global Interconn.         250,600
              Sys., AMP, Inc.
     1
      Excludes $77,200 of the total compensation computed by Ms.
     Meyer, representing 67 percent of a $115,231 long-term incentive
     compensation plan payout in 1992 that Ms. Meyer included in full,
     since the 1992 payout, according to the W.W. Grainger, Inc., proxy
     materials in the record, covered the company’s 3 fiscal years
     1990-92.

The 90th percentile of this range of compensation is $759,360.

Accordingly, reasonable compensation for petitioner’s heads of

operating divisions in 1992 would have been an amount not

exceeding $759,360.

                      (aa)      Mr. Garrett

     Mr. Garrett’s 1992 compensation, excluding the Retention

Payment and disputed 1991 SRP Benefit, was $591,893.           Because

reasonable compensation for Mr. Garrett in 1992 exceeded his 1992

compensation (exclusive of the Retention Payment and disputed

1991 SRP Benefit) by $167,467, this excess constitutes the amount

of Mr. Garrett’s Retention Payment and disputed 1991 SRP Benefit
                              - 117 -

that petitioner has shown by clear and convincing evidence was

reasonable compensation in 1992 for purposes of section

280G(b)(4).65

                    (bb)   Mr. Richardson

     Mr. Richardson’s 1992 compensation, excluding the Retention

Payment and disputed 1991 SRP Benefit, was $353,346.   Because

reasonable compensation for Mr. Richardson in 1992 exceeded his

1992 compensation (exclusive of the Retention Payment and

disputed 1991 SRP Benefit) by $406,014, this excess constitutes

the amount of Mr. Richardson’s Retention Payment and disputed

1991 SRP Benefit that petitioner has shown by clear and

convincing evidence was reasonable compensation in 1992 for

purposes of section 280G(b)(4).

     65
       Respondent also argues that Mr. Garrett’s Retention
Payment (but not his 1991 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., 54 Fed. Reg. 19407 (May 5, 1989). We need not address
this contention, however, because the disputed 1991 SRP Benefit
received by Mr. Garrett, which respondent concedes is not a
severance payment, equaled $239,712. We conclude above that
petitioner has established that $167,467 of the (combined)
Retention Payment and 1991 SRP Benefit paid to Mr. Garrett in
1992 constituted reasonable compensation. Amounts above this
figure are not reasonable compensation for 1992 services.
Accordingly, $167,467 of the $239,712 1991 SRP Benefit is
reasonable compensation, but the remainder of the 1991 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.
                                 - 118 -

                       (cc)   Mr. Thompson

     Mr. Thompson’s 1992 compensation, excluding the Retention

Payment,66 was $576,972.      Because reasonable compensation for Mr.

Thompson in 1992 exceeded his 1992 compensation (exclusive of the

Retention Payment) by $182,388, this excess constitutes the

amount of Mr. Thompson’s Retention Payment that petitioner has

shown by clear and convincing evidence was reasonable

compensation in 1992 for purposes of section 280G(b)(4).

                       (dd)   Mr. Williams

     Mr. Williams’s 1992 compensation, excluding the Retention

Payment and disputed 1991 SRP Benefit, was $430,401.      Because

reasonable compensation for Mr. Williams in 1992 exceeded his

1992 compensation (exclusive of the Retention Payment and

disputed 1991 SRP Benefit) by $328,959, this excess constitutes

the amount of Mr. Williams’s Retention Payment and disputed 1991

SRP Benefit that petitioner has shown by clear and convincing

evidence was reasonable compensation in 1992 for purposes of

section 280G(b)(4).

                 (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; i.e., for a chief

     66
          Mr. Thompson did not receive a 1991 SRP Benefit.
                              - 119 -

technology officer (Mr. Francis), treasurer (Mr. Free), director

of human resources (Mr. Hite), or sales and marketing executive

(Mr. Pugh).67   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 company.68    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

     67
       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.
     68
       Because Mr. Rosenbloom treated Mr. Pugh as equivalent to
the head of an operating division, see supra note 67, he did not
apply this assumption to Mr. Pugh.
                                - 120 -

“executive officers”, corporations have wide latitude in defining

their “executive officers”.   See 17 C.F.R. secs. 229.402(a)(3),

240.3b-7 (2000).   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 was 178,

367, 245, and 384 percent, respectively, we conclude that

petitioner has failed to establish clearly and convincingly that

any portion of the Retention Payments or disputed 1991 SRP

Benefits of these executives, deducted by petitioner in 1992,

constituted reasonable compensation for purposes of section

280G(b)(4)(A).

     To reflect the foregoing,

                                           Decision will be entered

                                      under Rule 155.