Taxation -Bonus Payment Issue

Your client, Sue Jones is the President ofNORCAL, with headquarters and operations located in Northern
California. NORCAL is a C Corporation. The corporation is a small, privately held company. She calls
You seeking your tax advice on planned bonuses for key employees of NORCAL. It is June 12, 20XX and
she wants to resolve this tax issue as soon as possible. NORCAL is a calendar year taxpayer. NORCAL
she has been successful with net revenues last year of $10,000,000. Ms. Jones owns 51% of the shares of
NORCAL. There are 9 other shareholders, all unrelated. Ms. Jones is the only shareholder who owns more
than 10% of the company stock. The CFO John Smith VP and EA each own 5% of NOR CAL stock.
Ms. Jones would like to recommend to the NORCAL Board of Directors that four individuals (the president,
, the CFO, the Vice President and the Executive Assistant) receive a bonus equal to their salary.
($500K; $300K; $250K, and $l00K respectively). Ms. Jones tells you that she believes that these salaries
Are comparable or perhaps slightly higher than market competitors. The corporation regularly pays dividends to shareholders and will continue to do so. The corporation

is an accrual basis taxpayer and employees are cash basis.
Ms. Jones would like your tax advice regarding these tentative bonus payments. She wants your advice on
how NORCAL can proceed.
Tony Kim (a tax partner in your firm) asks you to provide him with an office memo addressing Ms. Jones’
request for assistance. He understands that our firm may not have all of the necessary information at this
time to provide final tax advice to our client. As such, he asks that you conduct tax research to draft your
memo and, also, identifY in your memo the specific tax issue(s) and any additional facts that will be
necessary to provide tax advice to the client. Tony asks that you to review the firm’s tax pointers before
drafting your memo..