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C. Compensation for Services Actually Rendered
Although we have concluded that only a portion of Mr.
Menard’s compensation was reasonable in amount, as an alternative
basis for our decision, we now consider whether Mr. Menard’s
compensation was payment for services actually rendered. In
cases involving a closely held corporation, compensation paid to
a shareholder-employee is not the product of arm’s-length
bargaining and deserves special scrutiny. Charles Schneider &
Co. v. Commissioner, 500 F.2d 148, 152 (8th Cir. 1974), affg.
T.C. Memo. 1973-130; see also Exacto Spring Corp. v.
Commissioner, supra at 838. This is particularly so in this case
because the board of directors consisted of Mr. Menard; Mr.
Menard’s brother, L. Menard; and Mr. Rasmussen, who depended on
Mr. Menard for his own annual bonus. Respondent contends that
$19,261,609 of Mr. Menard’s compensation was a disguised
dividend.
In Exacto Spring Corp. v. Commissioner, 196 F.3d at 835, the
Court of Appeals for the Seventh Circuit stated that the “primary
purpose of section 162(a)(1)” is to prevent corporations from
disguising dividends as salary. The Court of Appeals for the
Seventh Circuit explained that, in addition to satisfying the
independent investor test, for compensation to qualify as a
deductible business expense, the compensation must be “a bona
fide expense”. Id. at 839. The Court of Appeals for the Seventh
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