Question

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. Write a three to four (3-4) page paper in which you: 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. 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. 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. The specific course learning outcomes associated with this assignment are: Analyze tax issues regarding corporate formations, capital structures, income tax, non-liquidating distributions, or other corporate levies. Prepare client, internal, and administrative documents that appropriately convey the results of tax research and planning. Create an approach to tax research that results in credible and current resources. Use technology and information resources to research issues in organizational tax research and planning. Write clearly and concisely about organizational tax research and planning using proper writing mechanics.

Answer 1

Tax

Name

Institution

Tax

Part 1

The transfer of inventory to an irrevocable trust or to a receiver of a revocable trust is considered taxable events that results in gift tax liability. In 2012, the gift tax exclusion was $13,000 annually per beneficiary, apart from gifts to a spouse that were never subject to gift tax. The sum of any gift tax that was above $13,000 was taxable at a rate that did not exceed 35 percent (Shurtz, 2009). One must file the gift tax return, Form 709; only in the case one actually owes the tax. The receiver of a gift is not liable for gift tax.

Estate tax normally is imposed on the portion of the amount of a dead person’s estate that is over the gift tax exclusion that is applicable during the year of the taxpayer’s bereavement. The dead taxpayer’s executor has an obligation to file Form in the case that the estate owes estate duties. The amount is $5,120,000 for taxpayers who met their death in that similar year (Solomon, Saret & CCH Incorporated, 2009). Inventories of an irrevocable trust are categorized assets of the trust itself, meaning that future estate taxes are never imposed since trusts are immortal.

Part 2

If the client had his lifetime gifting at $1 million according to rules of 2011, he is supposed to gift an extra $4million before the conclusion of the year with no requirements to remit federal gift taxes. If the client is married, the spouse can decide to gift an additional amount to increase the benefits (Solomon, Saret & CCH Incorporated, 2009). A number entities and special trusts can likewise be applied to leverage gifting by use of valuation discounts and value freezes. These as brought to the attention of the client involve IDGTs, GRATs, intra-family, and QPRTs.

References

Shurtz, N. (2009). Education planning: Taxes, trusts, and techniques. Chicago: American Bar

Association.

Solomon, L. D., Saret, L. J., & CCH Incorporated. (2009). Asset protection strategies. Chicago,

IL: CCH Inc.