ACC 565 help A Guide to career/uophelp.com ACC 565 help A Guide to career/uophelp.com | Page 10

ACC 565 Week 4 Assignment 2 Constructive Dividends,
Redemptions, and Related Party Losses (2 Papers)
For more course tutorials visit
www.uophelp.com
This paper of ACC 565 Week 4 Assignment 2
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 remaining 50% of the stock
of the construction company is owned by the client’s son. 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 redemption was treated as a
distribution under Section 301 of the IRC by the IRS.