Case Study Bob's Boat Company

Bob’s boat corporation’s current financial position based on its accumulated earnings and profits (E&P) of $3,000,000 and the belief that the current year will reflect profits of $800,000 before taxes justifies a cash or property dividend to the shareholders/employee’s. Bob is contemplating paying $10,000.00 to each of the twelve shareholders/employees or giving each a new boat that cost the company $10,000.00 but retails at $15,000.00. (which is considered a reasonable price by most consumers and deemed the fair market value (FMV)). However, the distributions will cause the receivers to possibly incur additional taxation such as net investment income tax and other hardships contingent on their personal tax bracket. Additionally, the corporation will need to pay tax on a possible distribution and recognize a gain on each of the twelve boats. Therefore, Bob is hesitating on paying a cash dividend or property dividend of a new boat and contemplating paying a hefty year-end bonus to each employee instead of declaring a dividend. Bob’s rationale is that he can provide a lucrative income boost for all the shareholders/employees with minimal tax repercussions and decrease the corporation’s current taxable income by reporting the payments as wages. Unfortunately, the Internal Revenue Service (IRS)

The IRS has “specific regulations concerning the tax deductibility of corporate expenses associated with the personal use by employees of corporate aircraft” (Kohn, 2012). The following IRC section will need to be reviewed 274-9 which pertains to expenses for entertainment and amusement or recreation activities and 26 CFR 1.61-21 encompassing taxation of fringe benefits and reverting to section 162 (a)(1) that questions whether the compensation should be considered a corporate expense as wages or a shareholder