John Johnson and his son, Joseph, own all outstanding stock of ABC Corporation. Both John and Joseph are officers in the corporation and, together with their uncle, Sam, comprise the entire board of directors. ABC uses the cash method of accounting and has a calendar year-end. In late 2011, the board of directors adopted the following legally enforceable resolution (agreed to in writing by each of the officers):

o Salary payments made to an officer of the corporation that shall be disallowed in whole or in part as a deductible expense for Federal income tax purposes shall be reimbursed by such officer to the corporation to the full extent of the disallowance. It shall be the duty of the board of directors to enforce payment of each such amount.

In 2017, ABC paid John $800,000 in compensation and Joseph received $650,000. On an audit in late 2018, the IRS found the compensation of both officers to be excessive. The IRS disallowed deductions for $400,000 of the payment to John and $350,000 of the payment to Joseph. The IRS recharacterized the disallowed payments as constructive dividends. Complying with the resolution by the board of directors, both John and Joseph repaid the disallowed compensation to ABC Corporation in 2019. John and Joseph have asked you to determine how their repayments should be treated for tax purposes. Joseph is still working as a highly compensated executive for ABC, while John is retired and living off his savings.

Prepare a memo for your firms client files describing the results of your research. Use the format below to prepare your memorandum. Minimum 500 words for this assignment. Use Primary sources for your research in addition to treaties, etc. This assignment is worth 50 points and is due February 13, 2020.

Tax Research Memorandum Sample Format

Date

TAX FILE MEMORANDUM

FROM: John Doe

TO: Company TAX FILE SUBJECT:

Facts:

Specific Issues:

Conclusion:

Law and Analysis:

Preparer ________

Reviewer ________

Partner ________

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