New Media WebSolutions, LLC is a full service software development company. New Medias projects range from basic website creation which starts at $1,000, to large database, computer program, or mobile application development. The larger projects can often create more than $250,000 in revenue. On these larger projects, New Media often accepts a small upfront payment, coupled with a promissory note that is payable once the project is complete according to the terms of the note.

In order to boost revenues, New Media hired sales consultants to meet with business owners to pitch project ideas and inform these business owners of New Medias capabilities. The purpose of these sales consultants was to acquire more customers. In order to do this, many times the sales consultants met with the business owners over lunch or dinner. Depending on the potential revenue of the client, some of the dinners or lunches took place as some of LAs swankiest restaurantsagain with the sole purpose of attracting new clients. New Media also begin spreading its geographic reach. In doing this, it sent a number of its sales consultants throughout the country and even to London to pitch New Medias services to Large companies. Thankfully, these consultants were successful in procuring over $600,000 worth of new business in London alone.

When traveling or meeting with clients, the consultants are required to submit expense ledgers that state the date of meetings, where the meeting was held, who the client was, and the cost of the meeting. The consultants are also supposed to submit the original receipt with the expense ledger in order to get reimbursed. The receipt requirement has not been heavily enforced lately. Instead, many consultants simply submit their expense ledgers and are then reimbursed. New Media has not cared too much about the lack of original receipts because the consultants are procuring many lucrative contracts, thus New Media believes the consultants are truthful in their expense claims.

Unfortunately, one of New Medias former clients, Big Time Tech, went through bankruptcy. The original agreement between New Media and Big Time Tech required Big Time to make a $50,000 down payment, followed by a $200,000 promissory note. Big Time Paid the original $50,000 deposit. Through the bankruptcy proceedings, $100,000 in debt of the promissory note was discharged, leaving Big Time only liable for $100,000 instead of the full $200,000.

New Medias manager came into your office frantic. New Media received a letter from the IRS stating that New Media owed additional taxes. The reason for the additional taxes is that the IRS disallowed $50,000 worth of New Medias meal and travel expenses claiming that the meals and trips to London were extravagant, and also because there are no contemporaneous records or receipts for those expenses. The IRS also disallowed New Medias $100,000 deduction of the partially worthless promissory note.

What are the issues raised and why does the client not owe any additional taxes?