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Company Compensation
Home Depot $2,841,307
Lowe’s 6,054,977
For TYE 1998, both Home Depot and Lowe’s had substantially
greater gross revenue, revenue growth, and net income than
Menards, but Menards had the highest return on equity and return
on assets of the three companies.
After applying the independent investor test established by
the Court of Appeals for the Seventh Circuit in Exacto Spring
Corp. v. Commissioner, supra, and after considering evidence of
CEO compensation paid by comparable companies as required by
section 1.162-7(b)(3), Income Tax Regs., we concluded that
Menards’s rate of return on equity was sufficient to create a
rebuttable presumption that Mr. Menard’s compensation for TYE
1998 was reasonable in amount but that the presumption of
reasonableness was rebutted by evidence drawn from comparable
companies that Mr. Menard’s compensation was not reasonable.
After evaluating the evidence, we held that Mr. Menard’s salary
for TYE 1998 was reasonable to the extent of $7,066,912 and
allowed Menards a deduction for that amount.
As an alternative basis for our decision, we decided whether
Mr. Menard’s compensation was payment purely for services
rendered or was instead a disguised dividend. In Exacto Spring
Corp. v. Commissioner, supra at 835, the Court of Appeals for the
Seventh Circuit stated that the “primary purpose of section
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