Menard, Inc. - Page 13

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               Any amount paid in the form of compensation, but not in                
               fact as the purchase price of services, is not                         
               deductible.  An ostensible salary paid by a corporation                
               may be a distribution of a dividend on stock.  This is                 
               likely to occur in the case of a corporation having few                
               shareholders, practically all of whom draw salaries.                   
               If in such a case the salaries are in excess of those                  
               ordinarily paid for similar services and the excessive                 
               payments correspond or bear a close relationship to the                
               stockholdings of the officers or employees, it would                   
               seem likely that the salaries are not paid wholly for                  
               services rendered, but that the excessive payments are                 
               a distribution of earnings upon the stock.  * * *                      
          As respondent points out, there is nothing in Exacto Spring Corp.           
          to indicate that the Court of Appeals now requires a finding of             
          bad faith to support a conclusion that some part of an                      
          executive’s salary is not purely for services or that the Court             
          of Appeals has rejected section 1.162-7(b)(1), Income Tax Regs.             
          (fact that salaries are higher than those ordinarily paid for               
          similar services is evidence that the salaries are probably not             
          paid solely for services rendered).                                         
               Payments to employee/shareholders of closely held                      
          corporations merit strict scrutiny.  Exacto Spring Corp. v.                 
          Commissioner, 196 F.3d at 838; Dexsil Corp. v. Commissioner, 147            
          F.3d 96 (2d Cir. 1998), remanding T.C. Memo. 1995-135; sec.                 
          1.162-7(b)(1), Income Tax Regs.  Mr. Menard owned directly 100              
          percent of the voting stock and 56 percent of the nonvoting stock           
          of Menards.  The only other shareholders were primarily members             
          of his family or trusts established for the benefit of Mr. Menard           
          and family members.  The majority of Menards’s board of directors           






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