Question

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% stock of a construction company. Your client received a Notice of Proposed Adjustments (NPA) on three (3) significant issues related to the building supply business for the years under examination. The three (3) issues identified in the Notice of Proposed Adjustments (NPA) are 1) unreasonable compensation, 2) stock redemptions, and 3) a rental loss. Additional facts regarding the issues are as follows: 1) Unreasonable compensation: The taxpayer receives a salary of $10 million composed of a $5 million base salary plus 5% of gross receipts not exceed $5 million. The total grossreceipts 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 dividends. 2) Stock redemption: 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 redeemption as a distribution under Section 301 of the Internal Revenue Code (IRC). 3) Rental loss: The rental loss results from a building leased to the construction company owned by the client and his son. Use the Internet to research the rules and income tax laws regarding unreasenable compensation, stock redemptions treated as dividends and related party losses. Based on the following tax reasearch process: 1) Determine the facts. 2) Identify the issues (questions). 3) Locate the applicable authorities. 4) Evaluate the authorities and choosethose to follow where the authorities conflict. 5) Analyze the factsin terms of the applicable authorities. 6) Communication conclusions and recommendations to the client.Write a three to four (3-4) page paper in which you: (1) Based on your research and the facts stated in the scenario, prepare a recommendation for your 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 your client to receive similar amounts in compensation in the future and avoid the taxation as a constructive dividend.

Answer 1