Menard, Inc. - Page 38

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          Exacto Spring Corp., the Court of Appeals for the Seventh Circuit           
          did not address the factual situation now before us where the               
          investors’ rate of return on their investment generated by the              
          taxpayer corporation, a closely held corporation, is sufficient             
          to create a rebuttable presumption that the compensation paid to            
          the corporation’s CEO is reasonable, but the compensation paid by           
          the taxpayer corporation to its CEO substantially exceeded the              
          compensation paid by comparable publicly traded corporations to             
          their CEOs.  We turn to the opinion of the Court of Appeals for             
          the Seventh Circuit in Exacto Spring Corp. for guidance.                    
               In Exacto Spring Corp. v. Commissioner, supra at 838, the              
          Court of Appeals for the Seventh Circuit stated as follows:                 
               In the case of a publicly held company, where the                      
               salaries of the highest executives are fixed by a board                
               of directors that those executives do not control, the                 
               danger of siphoning corporate earnings to executives in                
               the form of salary is not acute.  The danger is much                   
               greater in the case of a closely held corporation, in                  
               which ownership and management tend to coincide;                       
               unfortunately, as the opinion of the Tax Court in this                 
               case illustrates, judges are not competent to decide                   
               what business executives are worth.                                    
          Implicit in the above statement is the apparent belief of the               
          Court of Appeals for the Seventh Circuit that compensation of a             


               34(...continued)                                                       
          that we are required by sec. 1.162-7, Income Tax Regs., to                  
          consider evidence of how the marketplace values the services of             
          comparably situated executives in deciding whether the                      
          presumption of reasonableness has been rebutted, we shall treat             
          respondent’s concession as a concession that a presumption of               
          reasonableness arose and evaluate the evidence in deciding                  
          whether Mr. Menard’s compensation was reasonable.                           




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