• Skip to navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

American Academy of Estate Planning Attorneys

AAEPA, Inc

Find a Member Member's Login
Call Today (800) 846-1555
  • Membership
    • Membership Membership
    • submenu
      • Why Join?
      • Member Requirements
      • Become A Member
      • Meet the Team
  • Estate planning software
  • Education
  • Practice management
    • Practice management Practice Management
    • submenu
      • 11 Essential Systems
      • Coaching
      • Law Firm Marketing
  • Resources
    • Resources Resources
    • submenu
      • Live Training
      • Blog
  • Contact Us

What’s a Bonus and What’s a Dividend?

Home » Managing » What’s a Bonus and What’s a Dividend?
Dividend

In Brinks Gilson & Lione, P.C. v. Commissioner, T.C.Memo. 2016-20, the law firm was taxed as a C corporation. The shareholder-attorneys were paid a draw and then, at year-end, the remaining money was divided proportionate to the draw. The year-end bonus was treated as employee compensation, deductible by the corporation. This was done year after year after year. The law firm had a large, well-established accounting firm prepare its returns. Brinks argued that it had substantial authority for deducting the year-end bonuses for shareholder-attorneys as employee compensation and that it acted in good faith because it relied on a reputable accounting firm.

The Tax Court found that zeroing-out the earnings was not based on substantial authority, but rather that the excess earnings were in the nature of dividends. The Tax Court found the consistency of zeroing-out the earnings to be particularly problematic given that it had a relationship to profitability, not to the work performed that year. The Tax Court found that the law firm did not act with reasonable cause and in good faith because the accounting firm had not specifically advised about the deductibility of bonuses.

The Tax Court seems particularly inclined to uphold penalties when they may be applicable to law firms. It seems the Tax Court is saying, “You should know better.”

Regardless of how you structure your practice, make sure you abide by the rules set by the Service. If the practice is a C corporation, do not deduct bonuses which are really just dividends in disguise. Rather, they should be treated as dividends. In Brinks, If the bonuses had been a flat percentage of the base draw, rather than zeroing-out income, I suspect the firm would have fared much better with the Service and the Tax Court.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com

  • Author
  • Recent Posts
Steve Hartnett
Steve Hartnett
Director of Education, American Academy of Estate Planning Attorneys
Steve Hartnett
Latest posts by Steve Hartnett (see all)
  • Double Your Gifting with Spousal Gift-Splitting - January 11, 2022
  • Tax Planning for 2022 - December 28, 2021
  • Donor Advised Funds: Too Good to Be True? - August 10, 2021
SHARE

About Steve Hartnett

Director of Education, American Academy of Estate Planning Attorneys

Primary Sidebar

Subscribe to our blog

Recent Posts

  • Understanding Undue Influence – Part I
  • The Top 3 Estate Planning Must-Haves
  • How Do I Trust Thee… Part III
  • Time for a Mid-Year Check-In?
  • How Do I Trust Thee… Part II

Categories

  • Academy Girl Friday (33)
  • Client Services (238)
  • Coaching (33)
  • Consumer Advantage (3)
  • Counseling (21)
  • Elder Law (5)
  • Estate Planning (929)
  • Estate Planning Documents (5)
  • Estate Planning Education (201)
  • Financial Analysis (3)
  • Financial Services (1)
  • General (20)
  • Law Firm Marketing (282)
  • Law Firm Net Revenue (7)
  • Law Firm Staffing (99)
  • Law Firm Technology (45)
  • Law Firm Web Tips (186)
  • Leadership (191)
  • Legal Education (651)
  • Marketing Tools (2)
  • Medicaid (1)
  • Member Services (1)
  • Owners Compensation (1)
  • Peak Performer Focus (1)
  • Practice Building Calls (1)
  • Practice Management (497)
  • SEO/Social Media Support (3)
  • Software (6)
  • Strategic Planning (10)
  • Uncategorized (15)

Footer

logo of American Academy of Estate Planning Attorneys

About Us

  • Meet the Team
  • Site Map
  • Legal Notice
  • Privacy Policy

Explore Our Services

  • Coaching
  • Estate planning software
  • Events
  • Legal education
  • Marketing
  • Web and SEO

Keep in Touch

Mon-Fri

9444 Balboa Ave. Suite 300

San Diego

(800) 846-1555

info@aaepa.com

Take Back Control of Your Business and Your Life

+

footer section | American Academy of Estate Planning Attorneys

© 2022 American Academy of Estate Planning Attorneys, Inc All rights reserved.

We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent. Don't sell my personal information.
Cookie Settings Accept All
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
Save & Accept