Reference no: EM131336074
Assignment: Constructive Dividends, Redemptions, and Related Party Losses
Suppose you are a CPA hired to represent a client that is currently under examination by the IRS. The client is the president and 95% shareholder of a building supply sales and warehousing business. He also owns 50% of the stock of a construction company. The client's son owns the remaining 50% of the stock of the construction company. The client has received a Notice of Proposed Adjustments (NPA) on three significant issues related to the building supply business for the years under examination. The issues identified in the NPA are unreasonable compensation, stock redemptions, and a rental loss. Additional facts regarding the issues are reflected below:
• Unreasonable compensation: The taxpayer receives a salary of $10 million composed of a $5 million base salary plus 5% of gross receipts not to exceed $5 million. The total gross receipts of the building supply business are $300 million. The NPA by the IRS disallows the salary based on 5% of gross receipts as a constructive dividend.
• Stock redemptions: During the audit period, the construction company redeemed 50% of the outstanding stock owned by the client and 50% of the stock owned by the client's son, leaving each with the same ownership percentage of 50%. The IRS treated the redemption as a distribution under Section 301 of the IRC.
• Rental loss: The rental loss results from a building leased to the construction company owned by the client and his son.
Use the Internet databases to research the rules and income tax laws regarding unreasonable compensation, stock redemptions treated as dividends and related party losses. Be sure to use the six step tax research process in Chapter 1 and demonstrated in Appendix A of your textbook as a guide for your written response.
Write a four page paper in which you:
1. Based on your research and the facts stated in the scenario, prepare a recommendation for the client in which you advise either acceptance of the proposed adjustments or further appeal of the issue based on the potential for prevailing on appeal.
2. Create a tax plan for the future redemption of the client's stock owned in the construction company that will not be taxed according to Section 301 of the IRC.
3. Propose a strategy for the client to receive similar amounts in compensation in the future and avoid the taxation as a constructive dividend.
|
How do they relate to health care organizations striving
: Analyze the competencies you selected. How do they relate to health care organizations striving for a culture of excellence? How might gaining proficiency of these competencies better enable you to personally contribute to organizational excellenc..
|
|
Extensive user of erp systems
: Zappos is an extensive user of ERP systems to enable its business processes and to coordinate activities among its many offices, healthcare facilities and research centers. How would Partners use ERP systems to transact, manage and innovate, and ..
|
|
Develop three information tecnology new positions
: Develop three Information Tecnology (PROSOFT eng company) new positions, including one first-level management position.For each of these three new positions: include a needs analysis, diversity issues, job analysis, job descriptions and job qualifi..
|
|
What is the goal of empowerment
: How must traditional thinking be adjusted when implementing empowerment? What is the goal of empowerment?
|
|
Prepare a recommendation for the client in which you advise
: Based on your research and the facts stated in the scenario, prepare a recommendation for the client in which you advise either acceptance of the proposed adjustments or further appeal of the issue based on the potential for prevailing on appeal.
|
|
Write a explanation of the need for the building
: Imagine that you were tasked to build or redesign a health care facility in your local community.Research health care facilities in your area that may need renovation, or to find out what type of facility may be missing. Your research will help yo..
|
|
How much is total overhead costs at this level of activity
: Corrington Manufacturing Company prepared a fixed budget of 80,000 direct labor hours, Corrington then prepared a flexible budget at 78,000 labor hours. How much is total overhead costs at this level of activity?
|
|
Explain why the students must be wrong in their reasoning
: Can you tell whether a good is normal or inferior by looking at the shape of a single indifference curve? Explain your answer.
|
|
Law enforcement and community members
: TOPIC- Diversity an improving relationships between law enforcement and community members (Pick any city) Within this topic, key concepts need to be discovered, such as what are the effects of changes in home valuations or how does sudden populati..
|