Martin Martindale, the 40-year-old founder and president of Martindale Corporation (an accrual-basis, calendar-year C corporation), owns 60 percent of the stock and receives a salary of $600,000. Four unrelated shareholders own the rest of the stock equally. The corporation has paid dividends regularly to the shareholders and plans to continue to do so in the future. Martin plans to recommend that the board of directors authorize the payment of a bonus to himself and two other employees (all cash-basis, calendar-year individuals). The first employee is the vice president, who owns 10 percent of the corporation and receives a salary of $400,000. The other employee is the controller, who is not currently a shareholder in the corporation and receives a salary of $200,000. Martin would like the bonus to equal 75 percent of each recipients current salary. Martin believes that the total compensation is probably a little high when compared to the corporations competitors but Martindale is much more profitable. Martindales profits have increased by more than 20 percent in the last two years due to the efforts of the individuals who will receive the bonuses, while other businesses in the same industry showed an increase in profits of less than 10 percent. Martin asks you, as the corporations tax advisor, to recommend what the corporation needs to do so that it gets a deduction for the planned bonuses. Martin would prefer to pay the bonuses next year but deduct them this year.

Locate and read Mayson Manufacturing Co., 178 F.2d 115, 38 AFTR 1028, 492 USTC 9467 (CA6, 1949) and Elliotts Inc. 716 F.2d 1241, 52 AFTR 2d 83-5976, 83-2 USTC 9610 (CA9, 1985). Summarize the important points of these cases as they relate to Martindale.

Prepare a summary of the relevant Code and regulation sections as they apply to Martindale.

Prepare a one-paragraph summary for Martin on what the corporation needs to do to qualify for a deduction for the planned bonuses.