Week 4 - You Decide

In: Business and Management

Submitted By ajjoshwebster
Words 3320
Pages 14
Memo
To: John and Jane Smith
From: Alyssa Webster
Date: [ 2/2/2014 ]
Re: Memo summarizing various tax issues
1. John Smith's Tax Issues

Issue (a): How is the $300,000 treated for purposes of federal tax income?

Applicable Law and Analysis
Code Section 61(a) lists fifteen items that must be included in gross income. Number 1 on this list is compensation for services including fees, commission, fringe benefits and similar items. Number 2 is gross income derived from business (¶4301, reference 1). This is important because the $300,000 was a fee received as compensation for service as a lawyer. Also, as a lawyer, fees received are income derived from business.
Compensation for services is taxed when received (under cash basis) and at fair market value (¶4315, reference 1). This means the $300,000 is taxed in the year it is received and at the full value since the fair value of cash is the value at the time of transaction.

Conclusion
Based on Code Section 61(a) it is understood that the fee that is paid is compensation for the services performed by Mr. Smith and also part of his gross income from business. It is assumed that Mr. Smith will be reporting his taxes as a cash basis tax payer. Since this is the case, the full value of the $300,000 is taxed as gross income from last year (when it was received).

Issue (b): How is the $25,000 treated for purposes of federal tax income?

Applicable Law and Analysis
Code Section 61(a) lists fifteen items that must be included in gross income. Number 1 on the list is compensation for services including fees, commissions, fringe benefits and similar items (¶4301, reference 1).
Compensation for services is taxed when received (under cash basis) and at fair market value (¶4315, reference 1).
Gross income also includes amounts received that were part of an earlier year deduction or credit.…...

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