Tax research case
Morris, Inc., is an Indiana-based business operating as ‘Morris’. The company sells groceries and other related products in most parts of Midwest and was founded by John Morris. Having been in the company for a considerable duration, and having dedicated his time and resources in the establishment, Morris is entitled to a great share of the Company’s assets. Under the Management and stewardship of Morris, the Company grew tremendously from a profit of $60 million in 2001 to $318 million in 2013. The Company’s shareholders equity also grew outdoing its closest competitors.
Being the largest shareholder with approximately 55% shares, Morris owns all the voting rights in the company with other stakeholders being non-voting shareholders. Morris holds a senior position in the company and is paid a relatively modest salary as other administrators. However, Morris still contribute in other profit-sharing plans such as bonuses and other related incentives.
The company’s board of directors, for instance, introduced a 5% bonus program that was to be applicable to all stakeholders in the establishment. However, some members of the board suggested that Morris, given his role in the management of the company, should be given his own bonus plan. The plan was voted and passed but after sometimes most of the shareholders departed from the company leaving the board with Morris, his family members and the treasurer. The Internal Revenue Service, however, declared the 5 % bonus an extreme administrative compensation.
Any government globally will have viable and authoritative legislations that explicitly regulate the levying and collection of taxes. A taxing authority, for instance, is limited to very particular jurisdictions in a company or an establishment. Any issue that relates to the initiation of tax rates must be through the approval of the appropriate laws and decisions of board of governors. Bonuses in numerous cases are issued when the company is not in a position to pay cash dividends despite the massive profits realized. Bonuses, as a result, are relatively powerful alternatives in a company.
Rule of law
The IRS Code and Committee reports explicitly stipulate the rights to owning property with the right of administrative prowess precisely stated. The IRS takes into account of all the receivable in a company by looking at the financial records and other assets in the company. Morris, Inc. Company is vehemently subjected to IRS and committee regulations and must operate within the stipulated legislations. The committee carefully estimates the company’s financial stand and estimate the amount of tax to levy on the company.
The issue of Bonus Shares to the parity owner like Mr. Morris cannot be subjected to taxation, as it is not considered as a dividend. However, in a situation where the ideal shares are issued as Bonus Shares, they are arguably taxed as dividend. Given that, the Company with Morris as the major shareholder and who is treated to any capital gain in the company is chargeable to Tax levies according to the IRS and Committee Reports. Correspondingly, if Morris decides to relinquish his share bonuses, he will be liable to pay tax from the accrued capital gain on the bonuses sold.
Mr. Morris’ accrued bonuses under the recommendation of the Committee and the IRS is liable to taxation. Despite being a major shareholder in the company and having exclusive rights in the company, the legal authorities have the prerogative to tax Morris.
The case defined by the UK’s Court of law had been appealed by the HM Company and its customers over some schemes developed to avoid any potential levying of taxes on accrued bonus.
Berman, Daniel Marvin, and Victoria J.. Haneman. Making Tax Law. Carolina Academic Press, 2014.
Reda, James F., Stewart Reifler, and Michael L. Stevens. “Appendix D: Sample Compensation Committee Charters.” The Compensation Committee Handbook, Fourth Edition (2014): 527-545.
Salbador, Debra, et al. “ATA Tax Policy Subcommittee Report on Book-Tax Differences.” Journal of Legal Tax Research (2015).