Dear Mr. & Mrs. Smith,

It was a pleasure meeting with you on last week. This memo contains a list of the concerns that you mentioned during our meeting and the recommendation I have for each of your concerns. Please call me once you have reviewed the memo so we can go over any questions you may have and work on getting things in order.

John's questions:
a. How is the $300,000 treated for purposes of Federal tax income?
• The $300,000 is included in your gross income. You earned the $300,000 by providing legal services. For federal income tax purposes, "gross income" means all income from whatever source derived and includes compensation for services I.R.C. § 61. Any income, from whatever source, is presumed to be income under section 61, unless the taxpayer can establish that it is specifically exempted or excluded. In Reese v. United States, 24 F.3d 228, 231 (Fed. Cir. 1994), the court stated, "An abiding principle of federal tax law is that, absent an enumerated exception, gross income means all income from whatever source derived".

b. How is the $25,000 treated for purposes of Federal tax income?
• The 25,000 should be included as part of income for the current year. If the expenses had not been expensed or deducted in the year the expense was incurred then it should be deduction this year. Either way, the net effect should zero out.

c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?

There are a few tax planning strategies we can implement in order to increase maximize your deductions and reduce your liabilities.

• First of all let us make sure that you have the entity structure that best suits your needs. If your business which is an LLC has not filed the election to be treated as an S corporation I recommend that we do so immediately. Why? As an LLC filing a