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162(a)(1)” is to prevent corporations from disguising dividends
as salary. The Court of Appeals explained that, in addition to
satisfying the independent investor test, for compensation to
qualify as a deductible business expense, the compensation must
be “a bona fide expense”. Id. at 839. The Court of Appeals
described as “material” to this inquiry any evidence showing that
“the company did not in fact intend to pay * * * [the CEO] that
amount as salary, that * * * [the CEO’s] salary really did
include a concealed dividend though it need not have.” Id.
A taxpayer’s intent with respect to the payment of
compensation is a question of fact that must be decided on the
basis of the facts and circumstances. E.g., Paula Constr. Co. v.
Commissioner, 58 T.C. 1055, 1059 (1972), affd. without published
opinion 474 F.2d 1345 (5th Cir. 1973). After reviewing the
relevant facts and circumstances, we concluded that a portion of
Mr. Menard’s salary (the amount in excess of $7,066,912) was not
paid purely for services. In support of our conclusion, we
emphasized several facts. Menards, a closely held corporation,
had never paid a dividend. Menards’s board of directors awarded
Mr. Menard a bonus equal to 5 percent of Menards’s net income
before taxes without making any effort to evaluate whether the
bonus, combined with other components of Mr. Menard’s
compensation, would result in the payment of excessive and
unreasonable compensation. The 5-percent bonus was paid pursuant
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