Elias Schmidt is a rising soccer star from Rugen, Germany. He is a who has been playing professional soccer for Bayern Munchen. During the negotiations to renew his contract, Elias decided to visit his childhood friend, Greta Engleberger. She has been living in Washington, DC for the last 6 years. While visiting Greta, she encourages him to tryout for D.C. United, a MLS soccer team, to increase his

Midfielder

negotiating position with Bayern Munchen. The D.C. United team is so impressed with Elias, they make him an offer. Elias is reluctant to take the offer given that he feels European soccer offers better competition and the fact that he is somewhat worried about the language barrier as he is not fluent in English. This is the case despite the fact the D.C. offer was more lucrative his offers from European teams. With Greta acting as his negotiator and interpreter, Greta recommends that D.C. United offer Elias a signing bonus of $500,000. Upon receiving the updated offer with the signing bonus, Elias decides to move to the United States. He signs the contract with D.C. United. Greta also signed the contract as a witness and as an interpreter. Given his gratitude for Gretas encouragement and assistance in the negotiating process, he directs D.C. United to pay $50,000 of the signing bonus directly to Greta. Elias and Greta receive both receive the signing bonus in the current year. Greta will reported the $50,000 on her tax return and pay the appropriate federal income taxes. Elias reported only $450,000 of the bonus on his US federal income tax return. The IRS selected his return for audit. The revenue agent determined that the entire $500,000 is a bonus to Elias and it should have been included in his income. Elias seeks you out to represent him during the audit. Prepare a memo to the file on the position to be taken with respect to the signing bonus. (Note: Do not worry about the salary or any German tax consequences).