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Pages:
4 pages/≈1100 words
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Level:
APA
Subject:
Accounting, Finance, SPSS
Type:
Research Paper
Language:
English (U.S.)
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Topic:

Constructive Dividends, Redemptions, and Related Party Losses (Research Paper Sample)

Instructions:

Constructive Dividends, Redemptions, and Related Party Losses
Overview
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 stock of the construction company. 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:
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 IRC Section 301.
Rental loss: The rental loss results from a building leased to the construction company owned by the client and his son.
Instructions
Use the Internet and Strayer Library 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-step tax research process in Chapter 1 that was demonstrated in Appendix A of your textbook as a guide for your written response.
Write a 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.

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Content:


Constructive Dividends, Redemptions, and Related Party Losses
Name
Institutional Affiliation
Constructive Dividends, Redemptions, and Related Party Losses: Accounting Case Study
Background of the case
The client has been served with a notice of proposed adjustments (NPA) for unfair compensation, rental losses, and stock redemption. On top of the $5 million as salary, the client takes a $10 million check as salary and a further 5% of gross receipts against the NPA rules about unfair compensation. Secondly, the firm has redeemed 50% of the stock belonging to the client and his son, thus leaving 50% of the firm’s ownership to the two parties. According to Section 301 of the Internal Revenue Code (IRC), the Internal Revenue Service (IRS) considers this redemption as a distribution (Cornell Law School, n.d). Third, the client violates the NPA rules following the rental losses by leasing to a firm that is run by the client and his son. 

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