Hello,

I have a Tax research question related to salary, bonus and dividend. Need some idea on solving the issue. Please help. Below is the question.

Orange Barrel Consultants (OBC) is an engineering company specializing in the design of highway reconstruction projects. It is a Kentucky Corporation.Bill Bigguy is the sole shareholder and principal engineer.His employment agreement provides him with a base salary and bonus, which the board of directors determined at the end of each year.Bigguy makes all business decisions, and performs or supervises most of the business's managerial, marketing and negotiation functions. The firm employs five other engineers and Larry Littleguy CPA, the controller and office manager.

OBC is a fiscal year taxpayer (June 30).Bill's salary is set by the Board of Directors and has been 25% of Gross receipts for the last four years.However this traditionally has not been paid due to cash flow problems. The Board is comprised of Mary Sue Bigguy (wife of Bill), F. Lee Barrister (the firm's attorney), Tony Blacktop (President of Highway Paving, Inc.) and Bill Bigguy.

You received a telephone call from Larry Littleguy urgently seeking your advice.The Board recently met and authorized a bonus of $ 4,000,000 to Bill.Bill said he has been working 12 to 14 hours a day, six days a week for the last five years and he is out of here.He wants the check by this Friday as he is planning to leave for Hawaii on Saturday.(He is planning on buying a condo while he is there).

A quick review of the file provides following information:

Fiscal Year Gross Receipts Taxable I/C Retained Earnings Bill's Salary Dividend

2014 280000 10000 10000 50000 --

2015 700000 70000 80000 50000 --

2016 2190000 75000 155000 75000 --

2017 2193708 150000 305000 100000 --

Projected 2018 14000000 400000 705000 4100000 --

*After Bill's Salary

Due to past problems with construction projects (which Bill has previously indicated were not the firms fault) the firms faces several lawsuits requesting damages of $ 14,000,000.OBC's professional liability (errors and omissions) insurance has a $ 10,000,000 limit. No provision for future liability has been recorded for book or tax purposes.

All other employees receive bonus based upon the sole discretion of Bill Bigguy.He plans on issuing bonus checks to the five other engineers in the amount of $ 25,000 and one to Larry Littleguy for $ 5,000. None of those bonuses are based upon a profit participation formula nor are they approved by the board.

I need some idea on Larry's question and issues that may occur.