Your client, Bob, is the CEO of a corporation that has 12 stockholders who are also the only employees of the business. The corporation operates a boat dealership in Sherman, Texas. The corporation has accumulated earnings and profits of $3,000,000, not including the current year’s taxable income, which is expected to be $800,000. No dividends have been paid to stockholders. Bob has been very pleased with the corporation’s performance and he wants to reward the stockholders.
Bob is considering paying cash dividends of $10,000 per share or giving each employee a new boat that costs $10,000 and retails for $15,000.
In addition, when talking with Bob, you found that he has a corporate plane that he regularly uses for vacation and that he allows other corporate officers to use for vacation.
Should Bob consider paying a large year-end bonus to each employee instead of declaring dividends? Why or why not? Is there a tax issue that Bob needs to consider when loaning the corporate plane to stockholders for vacations? What actions can Bob take to minimize corporate tax while also providing rewards for stockholders?
Once everyone in the group has reported on the possible tax consequences, build on one another’s ideas until, as a group, you have fully fleshed out the advantages and disadvantages of each approach to Bob’s situation.
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