Your client, Hoosier Corporation, is owned by two shareholders: Amy and Max. At year-end 2019, the company accountant determined Amy was due a bonus payment for performance in the amount of $50,000. The company accountant also determined Max was owed $25,000. The bonuses are paid according to a complex formula dependent upon hours of contributed service. Max believes his hours were not properly accounted for and has refused to take receipt. The company accountant has refused to issue the checks to both shareholders until a reconciliation can be reached. The company has properly accrued the two amounts on its books as a deduction for financial reporting purposes.
Prepare a research memo for your firm’s file addressing the following two issues: First, do the two shareholders have to include the bonus payments in their income on their personal tax returns? See Bones v. Commissioner, 4 T.C. 415, 420 (1944); and Griffith v. Commissioner, 35 T.C. 882, 891 (1961). Second, in the event the taxpayers did not include the bonus payments in income, can the corporation take a deduction under Internal Revenue Code section 267?
Research Memo
The accountant of Hoosier Corporation determined that Amy and Max are entitled to some bonus payments based on hours of contributed service. This type of distribution of income usually takes place in small organisations where the shareholders are the people working for the organisations. The compensation can be in terms of salary or some bonus payments.
How Income and Distributions are Taxed:
The shareholders who are given these bonuses are required to treat it as income while filing their personal income tax returns and the organisation shall take deduction of such amount at the time of filing income tax return.
However, if the shareholders do not offer these amounts for taxation in their individual returns, the deduction for these amounts shall not be allowed to the organisation.
Note: From next time, please mention the length of the research memo desired. I have kept it crisp and to the point.
Your client, Hoosier Corporation, is owned by two shareholders: Amy and Max. At year-end 2019, the company accountant determined Amy was due a bonus payment for performance in the amount of $50,000. T...