- 62 -
lump sum rather than as Mr. Menard performed services. Perhaps
more problematic, this lump-sum payment was “practically no
different from a dividend”: a profit-based, yearend bonus paid
to the majority shareholder-officer.53 See RAPCO, Inc. v.
Commissioner, 85 F.3d 950, 954 n.2 (2d Cir. 1996), affg. T.C.
Memo. 1995-128.
We also find significant Mr. Menard’s agreement to reimburse
Menards for any portion of the 5-percent bonus disallowed as a
deduction. Such reimbursement clauses suggest that the taxpayer
had preexisting knowledge that the compensation may not satisfy
section 162(a)(1) and lead to the inference that the compensation
was intended, in part, as a disguised dividend. See Charles
Schneider & Co. v. Commissioner, 500 F.2d at 155; Saia Elec.,
Inc. v. Commissioner, T.C. Memo. 1974-290, affd. without
published opinion 536 F.2d 388 (5th Cir. 1976).
Petitioners assert that Menards intended Mr. Menard’s salary
and the 5-percent bonus as compensation purely for his services.
52(...continued)
of dividends paid by * * * [the taxpayer]” did not constitute
evidence that the CEO’s compensation was unreasonable for
purposes of the first prong of sec. 162(a)(1). However, the
Court of Appeals for the Seventh Circuit did not also reject this
factor for purposes of determining whether the compensation was
intended for personal services actually rendered. See Exacto
Spring Corp. v. Commissioner, supra at 839; see also sec.
162(a)(1).
53We note that Mr. Menard was also one of the three
directors who approved the 5-percent bonus.
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