Menard, Inc. - Page 5

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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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