Constructive Dividends, Redemptions, and Related Party Losses

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. The NPA is always given after violating the NPA rules by an individual or a corporation and a response should be made as per the stipulated period to prevent further sanctions. NPA issues comprise of tax and financial mishandling by a reporting company contrary to the Internal Revenue Service (IRS) recommendations and amendments should be made. While the company is not coerced to comply with the suggestions, it must agree to the recommendations to facilitate seamless reporting in the future and create a good relationship with the revenue authority. Using the tax research process comprising of six major steps, it is critical to resolve the tax problem in a structured manner and ensure that an exhaustive analysis of the problem and a comprehensive solution is reached.
Recommendation to accept of the NPA
The process of tax research is comprised of six major steps, including the determination of facts, issue identification, location of the relevant authority, authority assessment, drawing of conclusions and commendations, and providing the suggestions to the client. As a CPA to represent the client, the first step would involve gathering the facts of the case of a client summoned by the IRS for adjustments. The second step is the identification of the issues related to unfair compensation, rental losses, and stock redemption. Third, it is necessary to locate the relevant authorities such as the IRS, the Courts, and the Congress, as well as unofficial sources such as textbooks, journal articles, and tax services (Timbertax.org, n.d). Section 162 of the IRC provides that companies only deduct necessary operating expenses and there should be fair compensations based on services rendered. Fourth, upon locating the authorities, CPAs should evaluate and determine their relevance to the facts supplied. Fifth, based on the previous steps, conclusions, and suggestions are made in regards to the case, and lastly, the findings are communicated to the client and advised accordingly.
Based on the facts presented, the client should accept the NPA since his salary violates the IRS recommendation based on the 5% of gross receipts as a contrastive dividend. Unfair reimbursement is a gross violation of federal income tax laws. While the client may perceive the compensation as reasonable, it is irrationa...