Background:

Last year your client, John Adams, was paid $24,000 by Big Box to install a new air-conditioning unit at its headquarters building. The air conditioner did not function properly, and this year Big Box requested that John issue a refund. John determined that a critical part of the unit had malfunctioned, and, under the terms of the contract, refunded $8,000 to Big Box.

John tells you this when he comes to see you to prepare last years tax return. He feels that since he had to refund the $8,000 that he should not have to pay taxes on that money.

a. What amount of the $24,000 payment he received last year is John required to include in his gross income from last year?

b. What are the tax implications of the repayment if John was in the 35 percent tax bracket when he received the $24,000 payment from Big Box, but was in the 24 percent tax bracket when he refunded $8,000 to Big Box?

Write a memo to John Adams detailing the how the amounts received from and refunded to Big Box will be reported and in which tax years. Include an explanation of your analysis as well as an explanation of the relevant authorities so that John can understand the applicable law. Remember that John is not a tax accountant so you need to modify your language accordingly. Be sure to let him know if he has any options.

Your responsibility:

Prepare a tax research memo addressing the question that has been raised.

You will need to support your conclusion using primary sources of tax law. Your textbook is NOT primary authority. Please include at least two (2) different sources.

You must use proper citation form in your memo (see Chapter 2 for help with citation form). The form for this communication should be professional and in the form of a tax research memo. Do yourself a favor and look at the grading rubric before you submit.