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Acct553 You Decide Week 4

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Submitted By sjdemarco
Words 3272
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Memo

|To: |Mr. & Mrs. John Smith |
|From: |----------, CPA |
|CC: |---------------------- |
|Date: |May , 2013 |
|Re: |YOU DECIDE, WEEK 4 |

John Smith Tax Concern
1(a): The issue is the $300,000 in income for John’s fees. How to treat this in Federal Income Tax? In reading Cornell University Law School (as much of this memo comes from) referencing the IRS code, Section 61(a), the code the concept of income is broad and general. Gross income means all income from whatever source derived, including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments;
(9) Annuities;
(10) Income from life insurance and endowment contracts;
(11) Pensions;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.
(I.R.C § 61) My investigation of this leads me to conclude that Section 61(a) basically says that the gross income is not limited to these items, but that these are just the most typical sources of income. It is irrelevant whether or not the above items are received in money, goods, or services. So, in your context or question of what to do with the $300,000, the $300,000 that John received for services rendered from the court case is considered earned income for the year and should

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...You Decide-Week 4 ACCT553 John Smith tax issues: a. How is the $300,000 treated for purposes of federal tax income? Mr. Smith, in regards to your $300,000 earnings for the successful litigation of your clients case, this will be treated as current year earnings. The payment fits all three doctrines of income starting with the economic doctrine which states “all income from whatever source derived” IRC Code Sec. 61 (a). The constructive receipt doctrine, outlining constructive receipt of payments, allows us to treat the payment for this current year only even though it was income from a case that lasted two years. “Income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.” Reg. §1.451-2. Since these earnings were under the restriction of a successful verdict for your client, the payment could not be considered as earned any sooner than now. Since you operate your legal practice through an LLC, the assignment of income falls to the Limited Liability Corporation of which you are the primary member. Although the income is assigned to the LLC, there is only one layer of income tax, yours, since the LLC is treated as a conduit entity. All income will pass through to you as ordinary income, after business exclusions and deductions of course. The LLC is a disregarded entity and for federal tax purposes the activities of the business will be treated as if you were a sole proprietor (IRC Code Sec.752)...

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