Assignment 2

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:

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. 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.

   • Grading for this assignment will be based on answer quality, logic / organization of the paper, and language and writing skills, using the following rubric.

     Points: 200	Assignment 2: Constructive Dividends, Redemptions, and Related Party Losses
     Criteria	Unacceptable Below 70% F	Fair 70-79% C	Proficient 80-89% B	Exemplary 90-100% A
     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. Weight: 30%	Did not submit or incompletely prepared 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, based on your research and the facts stated in the scenario.	Partially prepared 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, based on your research and the facts stated in the scenario.	Satisfactorily prepared 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, based on your research and the facts stated in the scenario.	Thoroughly prepared 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, based on your research and the facts stated in the scenario.
     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. Weight: 30%	Did not submit or incompletely created 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.	Partially created 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.	Satisfactorily created 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.	Thoroughly created 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. Weight: 20%	Did not submit or incompletely proposed a strategy for the client to receive similar amounts in compensation in the future and avoid the taxation as a constructive dividend.	Partially proposed a strategy for the client to receive similar amounts in compensation in the future and avoid the taxation as a constructive dividend.	Satisfactorily proposed a strategy for the client to receive similar amounts in compensation in the future and avoid the taxation as a constructive dividend.	Thoroughly proposed a strategy for the client to receive similar amounts in compensation in the future and avoid the taxation as a constructive dividend.
     4. Writing Mechanics, Grammar, and Formatting Weight: 5%	Serious and persistent errors in grammar, spelling, punctuation, or formatting.	Partially free of errors in grammar, spelling, punctuation, or formatting.	Mostly free of errors in grammar, spelling, punctuation, or formatting.	Error free or almost error free grammar, spelling, punctuation, or formatting.
     5. Appropriate use of APA in-text citations and  reference section  Weight: 5%	Lack of in-text citations and / or lack of reference section.	In-text citations and references are provided, but they are only partially formatted correctly in APA style.	Most in-text citations and references are provided, and they are generally formatted correctly in APA style.	In-text citations and references are error free or almost error free and consistently formatted correctly in APA style.
     6. Information Literacy/Integration of Sources Weight: 5%	Serious errors in the integration of sources, such as intentional or accidental plagiarism, or failure to use in-text citations.	Sources are partially integrated using effective techniques of quoting, paraphrasing, and summarizing.	Sources are mostly integrated using effective techniques of quoting, paraphrasing, and summarizing.	Sources are consistently integrated using effective techniques of quoting, paraphrasing, and summarizing.
     7. Clarity and Coherence of Writing Weight: 5%	Information is confusing to the reader and fails to include reasons and evidence that logically support ideas.	Information is partially clear with minimal reasons and evidence that logically support ideas.	Information is mostly clear and generally supported with reasons and evidence that logically support ideas.	Information is provided in a clear, coherent, and consistent manner with reasons and evidence that logically support ideas.