Suppose you are a CPA hired to represent a client that is curently under examination
by the IRS- The client is the president and 9596 shareholder of a building supply sales
and warehousing business- He also owns 5096 of the stock of a construction
company- The client’s son owns the remaining 5096 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 596 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 596 of gross receipts as a constructive dividend-
Stock redemptions: Duing the audit period, the construction company redeemed 5096
of the outstanding stock owned by the client and 5096 of the stock owned by the
client’s son, leaving each with the same ownership percentage of 5096- The IRS
treated the redemption as a distribution under Section 301 of the IRO-
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 sue to use the six (6) step tax research process in Chapter 1
and demonstrated in Appendix A of you textbook as a guide for you written
response-
Write a three to fou (3-4) page paper in which you:
Based on you 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 futher appeal of the issue based on the potential for prevailing on
armeal-

 

Greate a tax plan for the futu’e redemption of the client’s stock owned in the
construction company that will not be taxed according to Section 301 of the IRO-
Propose a strategy for the client to receive similar amounts in compensation in the
futu’e and avoid the taxation as a constructive dividend-