Tax Court Determines Reasonable Compensation of Controlling Shareholder

Friday, September 17, 2004

The Tax Court yesterday decided Menard, Inc. v. Commissioner, T.C. Memo. 2004-207 (9/16/04), bringing to mind Judge Posner's warning in Exacto Spring Corp. v. Commissioner, 196 F.3d 833, 835 (7th Cir. 1999), that the Tax Court in reasonable compensation cases too often acts "as a superpersonnel department for closely held corporations, a role unsuitable for courts....The judges of the Tax Court are not equipped by training or experience to determine the salaries of corporate officers; no judges are." In Menard, the hardware chain paid its President-CEO-89% shareholder a $20.6 million salary. The IRS argued that only $1.3 million was a reasonable salary (with the remainder treated as a dividend). The Tax Court settled on $7.1 million as the reasonable salary.