Suppose you are a CPA hired to represent a client who 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 construction company’s stock. The client has received a notice of proposed adjustments (NPA) on three 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:
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 IRC Section 301.
Instructions
Write a 4-5-page explanation, following the client letter format, in which you:
Determine reasonable versus unreasonable compensation as outlined in the IRS 162(a) law.
Establish when stock redemption is taxable and when it is not. Provide an example of each situation as it relates to the assignment scenario.
Create a tax plan. Use Section 301 of the IRC.
Develop a research-based and ethical strategy for the client to receive multiple sources of compensation without getting penalized with taxes.
Assess the effect of an irrevocable trust on the gift tax and future estate taxes.
Propose ethical suggestions to reduce estate tax and gift taxes on property transfers.
Use at least three resources to support your research or recommendations. Choose credible, relevant, and appropriate sources, such as your course text, texts from previous taxation courses, or current IRS publications. If you require help with research, writing, and citation, access the library or review library guides.
For assistance with the client letter approach and formatting, please refer to Appendix A, “Tax Research Working Paper File” in your course text. A sample client letter is provided on page A-7 of the Appendix.
This course requires the use of Strayer Writing Standards (SWS). The library is your home for SWS assistance, including citations and formatting. Please refer to the Library site for all support. Check with your professor for any additional instructions.
The specific course learning outcomes associated with this assignment are:
Develop research-based organizational tax planning strategies for corporations and partnerships.
Create research-based and ethical recommendations to help organizations understand the tax implications of business decisions.
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