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 (3) 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 and Strayer 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 (6) step tax research process in Chapter 1 and
demonstrated in Appendix A of your textbook as a guide for your written
response. 6 steps are:
1. Determine the facts
2. Identify the issues
3. locate the applicable
authorities
4. Evaluate these authorities
5. Analyze the facts in terms
of applicable authorities
6. Communicate conclusions and
recommendations to others
Write a four (4) 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.
Your assignment must follow these formatting requirements:
·
Be typed, double spaced, using
Times New Roman font (size 12), with one-inch margins on all sides; citations
and references must follow APA or school-specific format. Check with your
professor for any additional instructions.
·
Include a cover page
containing the title of the assignment, the student’s name, the professor’s
name, the course title, and the date. The cover page and the reference page are
not included in the required assignment page length
