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According to petitioners, Menards’s growth and performance were
due to “the foresight, hard work, experience, skill, decision
making ability, and energy of Mr. Menard.” With the 5-percent
bonus, petitioners argue, Menards intended to establish a
consistent method for determining Mr. Menard’s variable
compensation based on his efforts and the company’s resulting
success.
Even though Mr. Menard’s hard work contributed greatly to
Menards’s success and, as a result of that success, the 5-percent
bonus generally increased each year, we disagree with petitioners
that this arrangement evinces an intent to compensate. Although
incentive compensation may encourage nonshareholder employees to
put forth their best efforts, a majority shareholder invested in
the company to the extent of Mr. Menard does not need the
incentive. See Charles Schneider & Co. v. Commissioner, supra at
153. When large shareholders base their compensation on a
percentage of the company’s income, the arrangement may suggest
an attempt to distribute profits without declaring a dividend.
See Hampton Corp. v. Commissioner, T.C. Memo. 1964-150, affd. 16
AFTR 2d 65-5265, 65-2 USTC par. 9611 (9th Cir. 1965).
Contrary to petitioners’ argument, the board’s decision,
made during the preceding fiscal year, to designate the 5-percent
bonus as Mr. Menard’s compensation for TYE 1998 does not insulate
petitioners from the conclusion that Menards intended to
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