Case Analysis

CASE ANALYSIS 4

CaseAnalysis

MENARD,INC. and JOHN R. MENARD, JR

V.

COMMISSIONEROF INTERNAL REVENUE

FACTS

Changein legal framework in 2003 indicated that dividends were to be taxedat a much lower maximum rate than that of salaries. This was at afifteen percent of dividend pay instead of a thirty five percentsalary pay. However, in 1998, Mr. Menard who founded MenardIncorporation had a tax bracket of thirty five percent. This meansthat if that law had been effected, then his corporation would havebeen taxed a $6.1 million as additional income tax without deductingthe $17.1 million bonus. In this case, if Mr. Menard had alreadyreceived his bonus as a dividend, he would have been expected to payfifteen percent of tax instead of thirty five percent. The IRSclaimed that the totality in all circumstances indicated thatMenard’s deduction were supposed be reimbursed (Court Case, 2009).This is because it held the view that Menard was excessivelycompensated.

Onthe other hand, the tax payer claimed that when any company’searnings fall, dividends may be cut only from one fixed amount. Thisis contrast with forcing such taxes to vary continuously like seen inpercentage earnings. The court found that a concealed dividend wasincluded in the five percent bonus that the corporation paid to Mr.Menard each end year (Court Case, 2009). This bonus may be paideither through installments throughout the year or end year, when thecorporation knows the specific earnings made.

ISSUE

Theissue of contention was whether the corporation’s board ofdirectors had in fact approved the five percent bonus paid to Mr.Menard in 1998. Further, there was a need of establishing whether thecorporation was acting in good faith paying Mr. Menard receiving that$ 17.5 as a dividend rather as a bonus.

HOLDING

Thecourt held that Mr. Menard’s bonus was paid in excessive comparingspecific objectives as well as functions. In this regard, thecourt’s position is that a corporation such as one held by Mr.Menard is the sole board member with voting rights, and cannot be ina position of paying its CEO.

RATIONALE

Therationale behind this decision was based on comparisons made to othercomparable CEOs in that same period.

Reference

UnitedStates Court of Appeal. (2009). MENARD, INC. and JOHN R. MENARD, JRV.COMMISSIONER OF INTERNAL REVENUE. United States. United StatesCourt of Appeal