Sue is 30 years old and is president and a 51% shareholder of C Corporation. She informs you that C Corporation has 10 shareholders, all unrelated. Other than herself, no shareholder owns more than 10% of the company's stock. Sue plans to recommend to the board of directors that it authorize the payment of a bonus to her and three other top employees. She asks you, as the company's tax advisor, to counsel her on what the company needs to do so that the company can get a deduction for the planned bonus payments.
After further discussions with Sue, you learn that the company's business is commercial real estate development. The company had net revenues last year totaling $10,000,000.
The company is an accrual-basis taxpayer, and each of the intended recipients employs the cash-basis-method of tax accounting. She would prefer the bonuses to actually be paid next year but deducted by the company this year. One of the intended recipients is Sue's executive assistant, who is not currently a shareholder in the company. Sue would like the bonus to equal 100% of each recipient's current salary. The current salaries of the intended recipients are as follows:
President ....................................$500,000
Executive Assistant ......................$100,000
Chief Financial Officer ..................$300,000
Vice President of Operations ............$250,000
The CFO and vice president of operations are shareholders in the company, each owning 10% of the stock.
Sue has indicated to you that she believes the annual salaries are comparable or, perhaps, a little on the high side when compared to her company's competitors. You also learn that the company regularly pays out dividends to shareholders and plans to continue to do so.
a. Do the Treasury regulations provide further guidance in this situation?
b. Do the Treasury regulations help to refine or add to the initial research question(s)?
c. Do the regulations adequately address the research question? If so, what are your conclusions, and on what are they based?