Question

Burt is the custodian at Quaker Inn, an S corporation that has paid him bonuses over the years in the form of shares in the corporation. Burt now holds 276 shares in Quaker Inn.

While listening to a television debate about a national health care plan, Burt decides that the company's health coverage is unfair. He is concerned about this because his wife, Dora, is seriously ill.

During the second week of December, Burt informs Quaker's president that he would like a Christmas bonus of $75,000 cash, or else he will sell 10 shares of his stock to one of his relatives, a nonresident alien. The resulting loss of the S election would trigger about $135,000 in federal corporate income taxes for the current year alone. How should Quaker Inn's management respond to Burt's threat? From Burt's point of view, do you see any unintended consequences if he follows through on his threat?

Answer 1

Answer

Quaker inn is having a S corporation status. A corpoartion become C corporation if any non resident alien is the shareholder of corporation hence a non resident alien cannot own any share in S corporation otherwise coorporation can loose its status of being S corporation and Corporate tax will need to be paid by Quaker as C corporation.

Burt has listened to some other more beneficial health policy which is better then health policy of quaker due to this he wants to sell 10 shares to his relative who is non resident alien. This can jeopardize the status of Quaker as S corporation.

If burt contnue to do so, then Quaker could end up paying huge amount $135000 as corporate taxes under status of C corporation.

Also it would be not appropriate for burt also because bonus would then be included in his taxable income.

Hence I would not advice burt to confront president of quaker with ultimatum for $75000. Instead he should ask for a meeting with president for reviewing the health policy of company and he shoukd discuss about solution with president.

Also if Burt gives an ultimatum in this scenario then as a management, case should be filed against burt for extortion payment of $75000. This could show cause burt resulting burt could face criminal charges.