Seventh Circuit finds $20 million bonus reasonable.

• Author: Nevius, Alistair M.

The Seventh Circuit has reversed a Tax Court decision holding that most of an executive's $20 million compensation was unreasonable and therefore a nondeductible dividend (Menard, Inc., No. 08-2125 (7th Cir. 3/10/09), rev'g T.C. Memo. 2005-3).

John Menard is founder and chief executive officer of Menard, Inc. In 1998, he earned a salary of $157,500 and also received a profit-sharing bonus of $3 million and a "5% bonus" of $17.5 million, based on the company's net income for the year. Menard had received a 5% bonus every year since 1973.

Under Sec. 162, a business can deduct a "reasonable allowance" for salaries and other compensation paid but cannot deduct amounts paid

as dividends (Sec. 301(c)). The Tax Court held that the 5% bonus was a disguised dividend and did not allow the company to deduct more than $7.1 million in compensation, the amount the court calculated was reasonable based on the pay of CEOs at similar companies.

The Seventh Circuit held that the Tax Court committed...