                       T.C. Memo. 2011-286



                     UNITED STATES TAX COURT



             ALLEN L. DAVIS, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 24329-06, 2757-07,   Filed December 12, 2011.
                  2758-07, 2759-07.



     Jeffrey H. Paravano, David J. Fischer, Samuel R. Linsky, Ted

T. Martin, Michael K. Gall, Benjamin G. Dusing, and Robert

Razzano, for petitioner in Docket No. 24329-06.

     Kenneth W. Gideon, Albert H. Turkus, Julia M. Kazaks, Daniel

P. Phillips, Arnette A. Steele, and Melissa L. Galetto, for

petitioners in Docket Nos. 2757-07, 2758-07, and 2759-07.




     1
      This case is consolidated for purposes of trial, briefing,
and opinion with the cases of J. David and Dianne M. Rosenberg,
Docket No. 2757-07, Jared A. and Bridget Davis, Docket No. 2758-
07, and A. David and Tracy Davis, Docket No. 2759-07.
                                - 2 -

     Gretchen Ann Kindel, Dawn Danley-Nichols, Robin Harrell, and

Matthew J. Fritz, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:    Respondent issued petitioners “whipsaw”2

deficiency notices determining deficiencies in their Federal

income tax for 2004.    Specifically, respondent determined a

$13,732,288 deficiency with respect to Allen L. Davis (Allen), a

$273,311 deficiency with respect to J. David Rosenberg

(Rosenberg) and Dianne M. Rosenberg, a $4,793,758 deficiency with

respect to Jared A. Davis (Jared) and Bridget Davis and a

$4,793,759 deficiency with respect to A. David Davis (David) and

Tracy Davis.

     Petitioners are shareholders of CNG Financial Corporation

(CNG), an S corporation.    The controversy in these cases concerns

an option that CNG granted to Allen in 2002.    There are two

issues for decision.    The first issue is what amount, if any,

Allen must include in his gross income as a result of his



     2
      A “whipsaw” is often a situation where deficiency notices
are issued to parties on both sides of a transaction who have
treated the same item of the transaction inconsistently,
typically including an item in income for one taxable entity and
allowing a deduction for the other. The alternative position in
each of the respective deficiency notices is that there is no
income and no deduction. Ultimately, the deficiency falls upon
the party that is unsuccessful. In this situation, the
Commissioner is more like a stakeholder between the two parties.
                                 - 3 -

exercise of the option in 2004.    We hold that he must include

$36,962,694 in gross income.    The second issue is whether the

company may deduct the same amount as reasonable compensation.

We hold it may.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    When the petitions were filed,

Allen resided in Florida, and all other petitioners resided in

Ohio.

     CNG operates a “payday” loan3 business through its

subsidiary, Check-N-Go, Inc.4    Jared founded CNG5 in 1994 with

the proceeds of a $100,000 loan from his parents, Allen and

Judith Davis (Judith).   During the company’s infancy, Allen also

informally advised Jared in the operation of the business.      In

1995, Jared’s brother David and his sister Laura Davis Klekamp

(Laura) acquired stock in CNG.    David also joined CNG as an


     3
      A “payday” loan is a short-term loan agreement in which the
borrower issues the lender a postdated check in the amount of the
loan principal plus a finance charge. When the loan becomes due,
the lender deposits the borrower’s check. These loans carry an
effective interest rate that is exorbitant, but borrowers are
typically compelled to accept the interest rate because they are
usually economically vulnerable.
     4
      For the sake of simplicity, we refer to both CNG Financial
Corporation and Check-N-Go, Inc. as CNG.
     5
      The company was originally named Check Mart, Inc. and was
renamed Check-N-Go, Inc. a year later.
                               - 4 -

officer and a director and became involved in the company’s

management.   At all relevant times, CNG’s stock was not traded on

an established securities market.

     CNG enjoyed great success from the start and sought to

aggressively expand its operations.    To do this, CNG required a

large infusion of cash, and it obtained financing from several

banks and from Allen.   In return for Allen’s loans, Jared and

David gave Allen options to purchase from each of them 188.86

shares of CNG stock (the 1997 options).6   Allen promised David

that he would not exercise the 1997 options unless he experienced

financial distress.

     In 1997 Jared, David, Laura and Allen also entered into a

stock transfer restriction agreement that, in the event of

certain attempted transfers of CNG stock by a CNG shareholder,

gave the other shareholders a right of first refusal to purchase

the stock at net book value.   The list of triggering events

included a forced sale pursuant to a divorce decree or other

legal process.

     In May 1998 Allen retired as president and chief executive

officer (CEO) of Provident Financial Group (Provident).   By that

time, he had been Provident’s president for 14 years.




     6
      The 377.72 shares represented a 23-percent interest in the
company.
                                 - 5 -

       In January 2000 Allen exercised the 1997 options, acquiring

23 percent of CNG’s stock.    He also entered into a voting trust

agreement with Jared that enabled him to vote Jared’s shares,

which represented a 33.5-percent ownership interest.    He asked

David to enter into a similar voting trust agreement, but David

refused.    Allen consequently used his majority control to remove

David from the board and elect himself president, CEO and

chairman of the board.

       In August 2000, CNG entered into a $70 million revolving

credit facility agreement (credit agreement) with a bank

syndicate led by National City Bank (the bank group).    The bank

group agreed to extend CNG credit in large part because of

Allen’s extensive experience in the banking industry at

Provident, and the bank group therefore insisted on Allen’s

continued involvement in the company.    The credit agreement thus

required Allen’s participation in the day-to-day management of

CNG.    The credit agreement also required CNG to obtain $10

million of additional external financing.    CNG satisfied this

requirement by borrowing $5 million each from Rosenberg (a friend

of the Davis family) and the Huntington Capital Investment

Company.    In connection with his loan, Rosenberg received a

warrant to purchase CNG stock.

       Allen resigned as an officer and director of CNG at the end

of 2000 but continued to serve as an independent consultant to
                                - 6 -

the company from January 2001 to December 2004.    While he was a

consultant, he continued to participate in the day-to-day

management of CNG.   Jared replaced Allen as CNG’s president and

CEO in April 2001.

     Judith filed for divorce from Allen in August 2001 and

claimed she was entitled to half of Allen’s CNG shares.    Allen

threatened, on numerous occasions, to leave CNG if his ownership

interest was reduced, which would have put CNG in a default

position with respect to the credit agreement.    Judith

nevertheless filed a motion asking the divorce court to order

Allen to immediately transfer half of his shares to her.

     The divorce was acrimonious and created strife within the

family.   Jared used Judith’s motion as an opportunity to push

Allen and Judith to reach a marital settlement agreement.    To

that end, Jared filed a complaint in an Ohio State court seeking

a declaratory judgment that Judith’s motion had triggered his

first refusal right under the share transfer restriction

agreement and asking the court to specifically enforce that right

by ordering Allen to sell him all of Allen’s shares at book

value.    Because the forced sale would have substantially devalued

the marital estate, Allen and Judith ultimately agreed to Jared’s

plan to resolve the family conflict (Jared’s plan) in late

December 2002.
                               - 7 -

     Under Jared’s plan, Allen transferred half of his CNG shares

to Judith, subject to an option allowing Allen to repurchase the

shares for $16 million (the Judith Option).   CNG then redeemed

the 188.86 shares from Judith and amended the Judith Option (the

Allen Option) by adding a cashless exercise provision.   The

cashless exercise provision allowed Allen to avoid paying any

portion of the exercise price and to instead receive a number of

shares (determined according to a formula) that were worth $16

million less than the value of 188.86 shares.   The Allen Option

was not transferable.   Also as part of Jared’s plan, Laura sold

her 10-percent interest in CNG to Allen, and the voting trust

agreement between Allen and Jared was rescinded.

     The redemption reduced the number of outstanding shares of

CNG stock from 1,642.25 to 1,453.39.   Jared, David and Allen were

left with ownership interests of 37.85 percent, 37.85 percent and

24.3 percent, respectively.   CNG made distributions to Jared,

David and Allen in proportion to these percentages from 2003 to

August 2004.

     At the end of 2002 CNG had 834 stores, revenues of $199.3

million and earnings before interest, taxes, depreciation and

amortization (EBITDA) of $44.6 million.   By the end of June 2004,

CNG had 1,106 stores, revenues of $272.7 million and EBITDA of

$62.3 million.   At the end of July 2004 CNG had an equity value

of approximately $460.5 million.
                               - 8 -

     In 2004 CNG anticipated an amendment of the credit agreement

with the bank group that would allow CNG to distribute $50

million to its shareholders.   To take part in this distribution,

Allen exercised the Allen Option through the cashless exercise

provision in early August 2004 and received 131.8055 shares of

CNG stock.7   Similarly, Rosenberg exercised his warrant in

September 2004 and received 140 shares of CNG stock.8   The credit

agreement was subsequently amended to increase CNG’s line of

credit to $150 million and to remove the covenant that required

Allen to be involved in the day-to-day management of CNG.

     CNG treated the stock as compensation to Allen, and

Rosenberg, Jared and David (collectively, the CNG parties) each

claimed their share of the company’s $36,962,694 compensation

deduction on their returns for 2004.9   Allen, on the other hand,


     7
      In July 2004 CNG split its existing (old) stock into a
class of voting common (voting) stock and a class of non-voting
common (non-voting) stock. Each outstanding share of the old
stock was split into one share of voting stock and 0.25 shares of
non-voting stock. When he exercised the Allen Option, Allen
received 131.8055 shares of voting stock and 3.2951 shares of
non-voting stock. Because he received the equivalent of 131.8055
shares of the old stock, for the sake of simplicity we will treat
him as having received the old stock and disregard the stock
split.
     8
      Rosenberg received 140 shares of voting stock and 3.5
shares of non-voting stock.
     9
      CNG apparently issued and kept as treasury stock the
57.0545 shares that Allen did not receive as a result of the
cashless exercise provision, leaving it with 1,642.25 shares
outstanding. Otherwise, CNG would have had 1,585.1955 shares
                                                   (continued...)
                                 - 9 -

did not treat the Allen Option’s exercise as taxable and did not

include the stock’s value in his gross income for 2004.

                                OPINION

        We are asked to decide whether the exercise of the Allen

Option resulted in gross income to Allen.     If we decide that it

does, we must then decide whether any of that amount is

deductible by CNG as reasonable compensation.

I.   Allen’s Receipt of CNG Stock

        When property is transferred in connection with the

performance of past, present or future services, a taxpayer must

include in gross income the excess of the property’s fair market

value over the amount paid for the property.     Sec. 83(a);10 sec.

1.83-3(f), Income Tax Regs.    In the case of options without a

readily ascertainable fair market value, section 83 applies to

the stock received upon exercise of the options rather than at

the time of receipt.     See sec. 83(e)(3) and (4); sec. 1.83-7(a),

Income Tax Regs.     If an option is not traded on an established

market, the option’s value is not readily ascertainable when the

option is non-transferable.    See sec. 1.83-7(b)(2)(i), Income Tax

Regs.



        9
      (...continued)
outstanding, and the 131.8055 shares Allen received would have
been worth approximately $38,293,311.
        10
      All section references are to the Internal Revenue Code in
effect for the year at issue, unless otherwise indicated.
                              - 10 -

     The parties disagree as to whether the CNG stock Allen

received in 2004 was transferred in connection with the

performance of services.   The CNG parties argue that it was.

Allen and respondent argue that it was not.    If we find that it

was, we must then determine the stock’s value.

     A.   Whether the Stock Was Transferred in Connection With the
          Performance of Services

     We first address the standard of proof.   Allen contends that

the Allen Option does not, in form, appear to have been granted

in connection with the performance of services, and therefore,

that the strict proof requirement of the Danielson rule11

prevents the CNG parties from showing otherwise.   Alternatively,

Allen contends that, if the Danielson rule does not apply, the




     11
      Under the Danielson rule, a party to an agreement can
challenge the Commissioner’s interpretation of the agreement’s
tax consequences only by producing proof which in an action
between the parties to the agreement would be admissible to alter
the construction or to show its unenforceability because of
mistake, undue influence, fraud, duress, etc. Commissioner v.
Danielson, 378 F.2d 771 (3d Cir. 1967), vacating and remanding 44
T.C. 549 (1965). The Courts of Appeals for the Sixth and
Eleventh Circuits, to which appeals in these cases would lie,
have adopted the Danielson rule. See Plante v. Commissioner, 168
F.3d 1279, 1280-1282 (11th Cir. 1999), affg. T.C. Memo. 1997-386;
N. Am. Rayon Corp. v. Commissioner, 12 F.3d 583, 587-588 (6th
Cir. 1993), affg. T.C. Memo. 1992-610.
                              - 11 -

“strong proof” rule12 applies instead.   We disagree with both

contentions.

     We have held that the Danielson rule does not apply when, as

in these cases, both parties to an agreement are before the Court

and the Commissioner does not object to the presentation of

evidence varying the terms of the agreement.    See Freeport

Transp. Inc. v. Commissioner, 63 T.C. 107, 115-116 (1974).     The

“strong proof” rule also does not apply here because, contrary to

Allen’s contention, the terms of the written option agreement

indicate that the Allen Option was granted in connection with the

performance of services, as we discuss below.    Thus, respondent

seeks to overcome the form of the agreement, and the “strong

proof” rule does not apply to respondent.   See Estate of Durkin

v. Commissioner, 99 T.C. 561, 573 (1992).   Because the Danielson

rule and the “strong proof” rule do not apply, we decide these

cases on the preponderance-of-the-evidence standard.

     We now turn to the characterization of the Allen Option.

Whether property was transferred in connection with the

performance of services is a question of fact.    Centel Commc’ns

Co. v. Commissioner, 92 T.C. 612, 627 (1989), affd. 920 F.2d 1335

(7th Cir. 1990).   Property does not necessarily have to be


     12
      The “strong proof” rule requires a party seeking to
overcome the form of an agreement to present “strong proof” that
the terms of the written instrument do not reflect the
contracting parties’ actual intentions. Estate of Durkin v.
Commissioner, 99 T.C. 561, 572-573 (1992).
                               - 12 -

transferred as “compensation” to trigger section 83.    MacNaughton

v. United States, 888 F.2d 418, 421 (6th Cir. 1989); Alves v.

Commissioner, 734 F.2d 478, 481-482 (9th Cir. 1984), affg. 79

T.C. 864 (1982).    The statute applies as long as there is some

relationship between the services performed and the property

transferred, even if additional reasons for the transfer (e.g.,

to give an employee a stake in the business) are present.     See

Alves v. Commissioner, 79 T.C. 864 (1982), affd. 734 F.2d 478

(9th Cir. 1984); Montelepre Systemed, Inc. v. Commissioner, T.C.

Memo. 1991-46, affd. 956 F.2d 496 (5th Cir. 1992).

     Here, the CNG stock was transferred to Allen in connection

with his performance of services because CNG granted the Allen

Option with the intention of securing Allen’s participation in

the day-to-day management of CNG.    Allen threatened to leave CNG,

which would have caused CNG to be in default of the credit

agreement with the bank group.    CNG needed the financing provided

by the bank group to continue its rapid expansion.    Jared

credibly testified that the Allen Option was granted to induce

Allen to stay.   The option agreement itself provides objective

evidence of CNG’s intent, as the agreement contains a provision

that required Allen to notify CNG in writing if he made a section

83(b) election.13


     13
      Section 83(b) allows a person who performs services in
connection with the transfer of property to elect to treat the
                                                   (continued...)
                                - 13 -

     Because CNG granted the Allen Option to secure Allen’s

participation in the management of the company, the stock Allen

received by exercising that option was transferred in connection

with the performance of services.    Whether CNG had other reasons

for granting the Allen Option does not alter that fact.

     B.    The Stock’s Value

     We now turn to the question of the value of the stock.

Valuation is a question of fact.     Estate of Newhouse v.

Commissioner, 94 T.C. 193, 217 (1990).    Determining fair market

value is an exercise in judgment on the part of the trier of

fact.     See Colonial Fabrics, Inc. v. Commissioner, 202 F.2d 105,

107 (2d Cir. 1953), affg. a Memorandum Opinion of this Court.

The value we find is determined by considering all of the

evidence.    See Silverman v. Commissioner, 538 F.2d 927, 933 (2d

Cir. 1976), affg. T.C. Memo. 1974-285; Alvary v. United States,

302 F.2d 790, 795 (2d Cir. 1962).

     Respondent and the CNG parties contend that the CNG stock’s

per-share value was established by the Allen Option’s cashless

exercise provision at approximately $280,434 per share (the $16

million exercise price divided by the 57.0545 shares CNG

retained).    They therefore argue that the value of the 131.8055

shares Allen received was $36,962,694.    For purposes of trial,



     13
      (...continued)
property as compensation in the year it is received.
                               - 14 -

Allen hired Alex W. Howard (Howard), senior managing director of

Howard Frazier Barker Elliot, Inc., to appraise the value of the

shares.   Howard reached a $25,31,378.30 value for the shares.     We

find the value established by the cashless exercise provision to

be a better starting point because that value was the product of

an arm’s-length transaction between Allen and CNG, while the

value Allen proposed is a number his expert unilaterally

determined for purposes of trial.

     Allen next argues that a 30-percent lack-of-marketability

discount should be applied to the cashless exercise provision’s

valuation.   We disagree.   When determining the value of unlisted

stock by reference to the value of listed stock, a discount is

typically warranted to reflect the unlisted stock’s lack of

marketability.   Mandelbaum v. Commissioner, T.C. Memo. 1995-255,

affd. without published opinion 91 F.3d 124 (3d Cir. 1996).    A

lack-of-marketability discount is inappropriate, however, where

unlisted stock is not valued by reference to the price of stock

listed on a public exchange.    Estate of Cloutier v. Commissioner,

T.C. Memo. 1996-49.   In Estate of Cloutier, the Court found that

the price of unlisted stock had not been valued in reference to

the price of listed stock because, unlike the situation in

Mandelbaum, the parties had stipulated to a value which neither

claimed to be the stock’s freely traded value.   Here, CNG could

not have agreed that the price established by the Allen Option
                                - 15 -

was the stock’s freely traded value.     Such a valuation would have

created a windfall for Allen.

     The Allen Option required Allen to pay $16 million in cash

to reacquire the 188.86 shares he had transferred to Judith.      The

option’s cashless exercise provision allowed him to effectively

pay the $16 million exercise price with $16 million worth of

stock instead.   According to the formula in the option, this

equaled 57.0545 shares at the time the option was exercised.

     If, as Allen contends, the cashless exercise provision

establishes only a nominal freely traded value for the shares by

failing to account for the stock’s lack of marketability, then

that would mean CNG accepted stock with a real fair market value

of $11.2 million ($16 million discounted by 30 percent) as

payment of the $16 million exercise price.    In other words, CNG

would have accepted payment of 70 cents on the dollar.    In that

case, if CNG had turned around and sold the 57.0545 shares it

retained under the cashless exercise provision, that sale would

have generated proceeds of only $11.2 million.    Looking at it

another way, if Allen had instead decided to sell $16 million

worth of CNG stock (at a 30-percent discount) and use the

proceeds of that sale to pay the $16 million cash exercise price,

he would have had to sell approximately 72.1 shares.14


     14
      Before the Allen Option was exercised, CNG stock was worth
approximately $316,876.52 per share based on 1,453.39 shares
                                                   (continued...)
                                 - 16 -

      We do not believe that by adding the cashless exercise

provision, CNG intended to reduce the option’s exercise price.

We therefore find that CNG stock Allen received when he exercised

the Allen Option was worth $36,962,694.

      C.   Conclusion

      Allen received the 131.8055 shares of CNG stock in

connection with the performance of services.      Those shares were

worth $36,962,694.      Accordingly, Allen must include that amount

in gross income for 2004.

II.   CNG’s Deduction for Reasonable Compensation

      We now turn to the question of whether CNG may deduct any

portion of the $36,962,694 as reasonable compensation.      When

property is transferred in connection with the performance of

services, an employer may deduct the amount included in the

employee’s gross income.     Sec. 83(h).   The deduction is limited

to a reasonable amount.     Sec. 162(a)(1).   Reasonableness is a

question of fact, and no single factor is decisive.      Kennedy v.

Commissioner, 671 F.2d 167, 173 (6th Cir. 1982), revg. 72 T.C.

793 (1980); Mayson Mfg. Co. v. Commissioner, 178 F.2d 115, 119

(6th Cir. 1949), revg. and remanding a Memorandum Opinion of this

Court.




      14
      (...continued)
outstanding.
                              - 17 -

     Respondent contends Allen’s total compensation for 2002 was

unreasonable because it far exceeded the amount other companies

in the industry paid their executives that year.    Respondent’s

comparison of Allen’s 2002 compensation to the industry standard

is not helpful because the event being taxed (and for which CNG

is claiming a deduction) is Allen’s receipt of CNG stock in 2004.

     This is not to say that the events of 2002 are irrelevant.

Allen received the stock by exercising the Allen Option, which

was granted to him in 2002.   It is therefore necessary to address

the 2002 grant, but section 162 and the underlying regulations

provide no guidance for doing so.   Moreover, there is no case

precedent that addresses how to ascertain the deductible value of

stock received from the exercise of a section 83 option where

there is no readily ascertainable value.    In the case of

contingent compensation agreements, however, contingent

compensation that turns out to be greater than the amount

ordinarily paid is nevertheless deductible if it was the result

of arm’s-length or free bargaining.    See sec. 1.162-7(b)(2),

Income Tax Regs.   The Allen Option operated in the same manner as

a contingent compensation agreement because the option’s cashless

exercise provision allowed Allen to receive the appreciation in

value on the 188.86 shares he had surrendered without paying any

cash.   Allen’s compensation was thus contingent on CNG’s
                                - 18 -

performance.     The better the returns on CNG’s business, the more

Allen was “paid”.

       The Allen Option was the product of negotiations and free

bargaining, and reasonable compensation was paid to Allen during

2004.     Although the family relationship between Allen, David and

Jared invites careful scrutiny, that relationship does not

necessarily prevent the agreement from being freely entered into

and at arm’s length.     See Kennedy v. Commissioner, supra at 175.

An agreement between family members in a closely held corporation

will be upheld if it is fair to the corporation in light of all

the circumstances.     Id.

        The Allen Option was granted in an arm’s-length transaction

because Jared and David had interests adverse to Allen’s and did

not merely acquiesce to Allen’s wishes.     Cf. Harolds Club v.

Commissioner, 340 F.2d 861 (9th Cir. 1965) (contingent

compensation agreement not a free bargain because the employee-

father dominated the shareholder-sons), affg. T.C. Memo. 1963-

198.     By the time the Allen Option was granted, Jared and David

were looking out for their own interests.     Jared had used the

complaint he filed in Ohio State court as leverage to force Allen

to relinquish voting control of his shares, and David had an

acutely adversarial relationship with Allen.     David distrusted

Allen from the time he broke his promise not to exercise the 1997

options and removed David from the board.     Jared and David also
                                - 19 -

had interests adverse to Allen’s.    They had an incentive not to

overcompensate Allen because the more he was paid, the less they

received.    See Rotolo v. Commissioner, 88 T.C. 1500, 1526 (1987).

       At the time the agreement was entered into, it was fair to

CNG.    Allen threatened to leave CNG unless he was given the

opportunity to maintain his ownership interest in CNG.       CNG,

however, needed Allen to secure financing.       The bank group

extended CNG credit only because of Allen’s experience at

Provident, and the covenant in the credit agreement required

Allen’s participation in the day-to-day management of CNG.        CNG

needed that financing to fuel its exponential expansion.

       CNG was exceptionally successful from the time the Allen

Option was granted to the time it was exercised.       During that

period, CNG opened 272 new stores.       CNG’s revenues increased

approximately 37 percent from $199.3 million to $272.7 million,

and its EBITDA increased approximately 40 percent from $44.6 to

$62.3 million.

       This success was mostly attributable to Allen.    CNG could

not have expanded as quickly as it did without Allen because the

covenant requiring Allen’s participation in CNG’s management was

not removed until the credit agreement was renegotiated in

September 2004.    “An employee responsible for the financial

success and growth of a large and complex enterprise is entitled

to substantial compensation.”    Lundy Packing Co. v. Commissioner,
                               - 20 -

T.C. Memo. 1979-472; see also Albert Van Luit Co. v.

Commissioner, T.C. Memo. 1975-56.

     The granting of the Allen Option was reasonable because it

was not a one-sided bargain.   See Kennedy v. Commissioner, 671

F.2d at 174.   The option enabled CNG’s expansion, and that

expansion increased the company’s revenues and income not only

for the period the option was outstanding, but also for future

years.   Jared and David also benefitted from the Allen Option

because CNG’s success increased the value of their ownership

interests.   Under the facts and circumstances of these particular

cases, we find that Allen’s 2004 compensation was reasonable and

hold that CNG is entitled to deduct $36,962,694 as reasonable

compensation to Allen in 2004.

     In reaching our holdings, we have considered all arguments

made, and to the extent not mentioned, we consider them

irrelevant, moot, or without merit.

     To reflect the foregoing,



                                           Decision will be entered

                                      under Rule 155 in docket No.

                                      24329-06, and decisions will

                                      be entered for petitioners in

                                      docket Nos. 2757-07, 2758-07,

                                      and 2759-07.
