Facts:

Dr. Jacobs is a veterinarian who is the only shareholder of Jacobs Pet Center, Inc., an S Corporation, and he is a married individual filing a joint tax return with his spouse. The S Corporations income is most of his income on their tax return.The corporation offers services and sell pet related products. He also has 8employees working for him with wages of $500,000. Jacobs does not receive any regular payments from the corporation as compensation, but he withdraws funds as the need arises. During the current year, he withdrew $725,000, and the net income of the corporation is $900,000. The corporation does not deduct the $725,000 of withdraws, nor does Jacobs include it in gross income. Jacobs does, however, report the $900,000 from his S Corporation K-1 in gross income on his Schedule E prepared by his CPA. Because Dr. Jacobs has recognized the corporations income in his form 1040, he sees no reason to pay himself a salary. He justifies the treatment by arguing that he is not an employee (i.e., he is the owner) of the corporation, and that the Federal and State income tax consequences are identical.

Questions:

Do you agree with Jacobs?

What are the issues with the position that Jacobs is taking if any?

What do you think he should do if you dont agree with Jacobs?

Would your answer change if the entity was an LLC or C Corporation?

What entity do you recommend for Jacobs?

If the facts are not present to answer the question you must provide your assumptions in your research memorandum.Resources and requirements: Use the tax resources (CCH and RIA Checkpoint) to research and answer your questions above. . Make sure you address all types and aspects of taxes. Your research should be written in a memorandum-see format below. Your memorandum should be at least 1,000 words. Include all your properly cited authorities toreceive full credit.

November 18, 20XX

TAX FILE MEMORANDUM

To:XXXXXXXXX

From: XXXXXXXX

SUBJECT: Advice in resolving disputed tax issue arising from IRS audit notice to Peaceful Pasture Funeral Home, Inc.

FACTS:

Peaceful Pasture Funeral Home, Inc. (here is referred to as client) a full service funeral operation and sells of goods to those services, has created a program for customers to pay in advance for goods and services that will are to be provided upon their death. Terms of contracts stipulate that all payments are refundable at the request of the purchaser at any time until said goods and/or services have been furnished. The client has stated that they are an accrual basis taxpayer identifies these payments as income in the year services and goods are provided.

ISSUE: Does the prepayment of funeral cost by the customer constitute prepaid income that is subject to tax in the fiscal year received?

CONCLUSION: The clients receivables that are prepayments will be included as income.

DUSCUSSION AND ANALYSIS:

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