Suppose you are a CPA hired to represent a client who is currently under examination by the IRS. The client is the president and 95% shareholder of a building supply sales and warehousing business. He also owns 50% of the stock of a construction company. The clients son owns the remaining 50% of the stock of the construction company. The client has received a Notice of Proposed Adjustments (NPA) on three (3) significant issues related to the building supply business for the years under examination. The issues identified in the NPA are unreasonable compensation, stock redemptions, and a rental loss. Additional facts regarding the issues are reflected below:

• Unreasonable compensation: The taxpayer receives a salary of $10 million composed of a $5 million base salary plus 5% of gross receipts not to exceed $5 million. The total gross receipts of the building supply business are $300 million. The NPA by the IRS disallows the salary based on 5% of gross receipts as a constructive dividend.
• Stock redemptions: During the audit period, the construction company redeemed 50% of the outstanding stock owned by the client and 50% of the stock owned by the clients son, leaving each with the same ownership percentage of 50%. The IRS treated the redemption as a distribution under Section 301 of the IRC.
• Rental loss: The rental loss results from a building leased to the construction company owned by the client and his son.

Use the Internet and Strayer Library to research the rules and income tax laws regarding unreasonable compensation, stock redemptions treated as dividends, and related party losses. Be sure to use the six (6) step tax research process in Chapter 1 that was demonstrated in Appendix A of your textbook as a guide for your written response.

Write a three to four (3-4) page paper in which you:

1. Based on your research and the facts stated in the scenario, prepare a recommendation for the client in which you advise either acceptance of the proposed adjustments or further appeal of the issue based on the potential for prevailing on appeal.
2. Create a tax plan for the future redemption of the clients stock owned in the construction company that will not be taxed according to Section 301 of the IRC.
3. Propose a strategy for the client to receive similar amounts in compensation in the future and avoid the taxation as a constructive dividend.