ACC 565 Week 4 Assignment 2

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ACC 565 Week 4 Assignment 2

ACC 565 WEEK 4 ASSIGNMENT 2

Assignment 2 :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 remaining 50% of the stock of the construction company is owned by the client’s son. 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 redemption was treated as a distribution under Section 301 of the IRC by the IRS.

· Rental loss: The rental loss results from a building leased to the construction company owned by the client and his son.

Write a three 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.

4. Use the six (6) step tax research process to record your research for communications to the client.

Use the Internet and 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.

Description

ACC 565 Week 4 Assignment 2,

Being The CPA, I would like to provide my recommendations on the issues mentioned by you as follows:

Applicable Laws:

As for the compensation, which is supposed to be paid to the shareholders of the company, there are some strict regulations under IRC and supporting authorities acting for the same. No compensation can be provided to any shareholder more than the amount paid to any other shareholder of the company is the same situation and circumstances. Redemption of stock held by the company is also considered as the compensation to the company so the company is not having the stock ownership any more. IRS rules explain that the losses, which are incurred as a result of any passive activity, are not allowed in a scenario where the income of the person increases the passive activities performed.  The only exception to this the case is where the claimant is a real state personal as per the IRS rules.

For such personal there are no limits to the loss and income arising and such income and loss is not supposed to be arising from the passive activities.

Issues under Consideration:

You are under consideration by the IRS and a notice is served to you called the notice of proposed Adjustments.

 

Being The CPA, I would like to provide my recommendations on the issues mentioned by you as follows:

Applicable Laws:

As for the compensation, which is supposed to be paid to the shareholders of the company, there are some strict regulations under IRC and supporting authorities acting for the same. No compensation can be provided to any shareholder more than the amount paid to any other shareholder of the company is the same situation and circumstances. Redemption of stock held by the company is also considered as the compensation to the company so the company is not having the stock ownership any more. IRS rules explain that the losses, which are incurred as a result of any passive activity, are not allowed in a scenario where the income of the person increases the passive activities performed.  The only exception to this the case is where the claimant is a real state personal as per the IRS rules.

For such personal there are no limits to the loss and income arising and such income and loss is not supposed to be arising from the passive activities.

Issues under Consideration:

You are under consideration by the IRS and a notice is served to you called the notice of proposed Adjustments.

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