- 64 -
distribute profits. With a corporation as successful and
profitable as Menards, at the time of the board’s resolution,
barring some unforeseen catastrophe, the board could count on Mr.
Menard’s receiving a sizable bonus in TYE 1998 pursuant to the
formula. Moreover, the failure of the board, whose members were
Menard employees and/or family members of Mr. Menard’s, to make
any effort to ascertain the market value of comparable corporate
executives or to periodically evaluate the formula as a gauge of
reasonable compensation, reinforces the impression that it was
used to enable Mr. Menard to claim an extravagant bonus unrelated
to the actual market value of his services as a corporate CEO.
On the basis of the evidence discussed, supra, we conclude
that Mr. Menard’s compensation was not intended entirely for
personal services rendered and contained a distribution of
profits. Any amount in excess of $7,066,912 is unreasonable and
a disguised dividend. See supra pp. 53-58. Accordingly, we hold
that Menards is entitled to deduct $7,066,912 as an ordinary and
necessary business expense pursuant to section 162(a)(1).
III. Deductibility of the TMI Expenses
Section 162(a) provides a deduction for ordinary and
necessary expenses that a taxpayer pays or incurs during the
taxable year in carrying on a trade or business. A taxpayer must
maintain books of account or records sufficient to establish the
Page: Previous 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 NextLast modified: May 25, 2011