Assignment 1
Discussion 1
"Preferred Stock Bailouts and Personal Holding Company" Please respond to the following:
• From your analysis of Section 306 in the e-Activity, differentiate between the tax treatment of earnings and profit on the distributing corporation of both a sale of Section 306 stock and redemption of Section 306 stock. Suggest the most important reasons for this differentiation in tax treatment.
• Per the text, the personal holding company (PHC) tax penalizes taxpayers who enter into tax-motivated transactions designed to shelter passive income of closely held corporations from higher individual tax rates. Suppose you represent a professional athlete who is the majority owner of a corporation. The corporation has several personal service contracts with advertising agencies and endorsements for your client in addition to passive income. Propose a plan in which you eliminate the potential for the PHC tax on the client's corporation.
Discussion 2
"Corporate Liquidations, Taxable Acquisition Transactions, and Nontaxable Reorganizations" Please respond to the following:
• From the e-Activity, evaluate the appropriateness of the techniques used and the common issues pursued by the IRS in corporate liquidations and dissolutions. Create an argument to defend the client if the IRS pursues the assignment of income doctrine or the clear reflection of income doctrine on a cash-basis corporation, as reflected in the Examining Officers Guide (EOG).
• IRC Section 338 allows a deemed sale election generating immediate taxation to the target corporation and a stepped-up or stepped-down basis to the price paid by the acquiring corporation for the target corporation stock plus liabilities on the deemed sale. Examine at least one benefit of a Section IRC 338 liquidation election for a target corporation. Create a situation which demonstrates a favorable IRC Section 338 liquidation election for a target corporation.
Discussion 3
"Consolidated Net Operating Losses and Consolidated Tax Returns" Based on the lecture, address the following:
• Imagine that a client is pursuing the acquisition of Corporation A that has a substantial net operating loss. Corporation B is a member of the controlled group and is currently included in the consolidated tax return that also has a net operating loss. Analyze the potential advantages and disadvantages of Corporation B's acquisition of Corporation A and Corporation A's subsequent inclusion in Corporation B's consolidated tax return. Suggest the key tax issues the client should consider in determining the deductibility of the net operating losses.
• Imagine that corporations P, S, and C are members of a parent-subsidiary controlled group filing a consolidated tax return. Corporations A and B are members of a brother-sister controlled group that cannot file a consolidated tax return. Design a strategy geared toward creating an affiliated group which makes Corporations A, B, P, S, and C all eligible to file a consolidated tax return.
Assignment 2: Constructive Dividends, Redemptions, and Related Party Losses
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 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 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 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.