Menard, Inc. - Page 66

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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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