Discussion 3-1

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 years taxable income, which is expected to be $800,000. No dividends have been paid to stockholders. Bob has been very pleased with the corporations 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.

1- Should Bob consider paying a large year-end bonus to each employee instead of declaring dividends? Why or why not?

2- Is there a tax issue that Bob needs to consider when loaning the corporate plane to stockholders for vacations?

3- What actions can Bob take to minimize corporate tax while also providing rewards for stockholders?