Harolds Club v. Commissioner – court said not a free bargain between employee/employer because of father/son relationship. Unreasonable portion not deductible but income to employee because not a gift.
Exacto – Posner’s individual investor test –
Basic Idea: Owner/investor of assets hires a person to manage the assets. In return for salary, employee works to maximize the value of the assets. If the owner/investor is getting a return greater than the market would give, then the compensation is presumptively fair. Looking for reasonable under the circumstances (and to Posner, reasonable turns on what you’re doing for the company -- if you’re making it successful (determined by bottom-line performance), then it is reasonable for you to be well compensated).
Note that he also considers market conditions to be relevant here: (goes to the idea of “services rendered”) if the bottom line performance is just normal market performance at the time, then might not be attributable to the management.