A1 Business and Technical College The Happy Mart Inc Tax Memo Homework All the requirements are mentioned in the attached files.if you have any question pl

A1 Business and Technical College The Happy Mart Inc Tax Memo Homework All the requirements are mentioned in the attached files.if you have any question please let me know Earlier this year, The Happy Mart, Inc. moved its corporate headquarters from Davenport, Iowa
to Jonesboro, GA (a suburb of Atlanta). At the end of 2018, the company had 400 employees in
its Davenport headquarters, all of whom were participants in its pension plan. As a result of the
move, 101 jobs were eliminated. 28 employees were offered jobs in Georgia, but choose not to
take them. 25 of these employees were not vested in their retirement benefits, 3 of them were.
These jobs will be replaced in Jonesboro by the end of the year. 29 employees were eligible for
normal retirement, and chose to retire rather than move. The remaining 44 jobs were eliminated
as part of efficiency measures associated with the move. Of the 44 employees whose jobs were
eliminated, 35 of them were not vested in their retirement benefits. Dorothy Anderson, The
Happy Mart’s CFO, wants to know it the company had a partial termination of its retirement
plan?
Requirements:
1- Memo format as the sample attached
2- You must use Westlaw
3- you should understand that your discussion should cover some of the
consequences of the rule of law. You must use Westlaw on this one.
4- Remember, you must document your use of the required research tool. Take a
screen shot and attach it as the last page of your memo. It just needs to be
enough to let me know you used the right tool and your research was generally
headed in the right direction. No more than one page. You can use as many
different sources as you want, but you must document your use of the one
required tool.
Note: To get access to the Westlaw Database follow the instructions below:
Go to https://www.astate.edu/
Then Library on the top of the page
Then Research database, the first option on the left side of the page
Choose letter [W]
Scroll down and choose WestlawNext Campus Research
Username : Mhdayman.zabad
Password: Ayman123zza
Assignment:
John Juniper and Susie Sage are each 50% shareholders in Landscapemasters Nursery, Inc., a
company formed by their grandfather. Each works for the company, but neither is involved in the
financial end of the business. Recently, John received a letter from the IRS dealing with changes to
the corporate return as a result of an IRS audit. Basically, the letter informed John that $500,000 of
his 2004 salary was being reclassified from salary to dividend income. The income tax impact to
John is minimal, but the reclassification to the company will result in an increase in taxable income of
$500,000. Up to this point, John has been our client, but Landscapemasters has not been a client.
John has asked us to review the reclassification. I have reviewed the revenue agent’s report (RAR),
and the reclassification was based on a determination that the payments made to John were not
intended to be compensation. The company has a well documented compensation policy, and the
payments to John can be defended as reasonable. Can the IRS reclassify salary as dividends without
a showing that the payments were unreasonable?
INTEROFFICE MEMORAND UM
TO:
PIC TAXATION
FROM:
JOHN ROBERTSON
SUBJECT:
JOHN JUNIPER AND LANDSCAPEMASTERS NURSERY, INC.
DATE:
1/26/2012
FACTS
John Juniper and Susie Sage are each 50% shareholders in Landscapemasters Nursery, Inc., a
company formed by their grandfather. Each works for the company, but neither is involved in the
financial end of the business. Recently, John received a letter from the IRS dealing with changes to
the corporate return as a result of an IRS audit. The letter informed John that $500,000 of his 2004
salary was being reclassified from salary to dividend income. John has asked us to review the
reclassification. The reclassification was based on a determination that the payments made to John
were not intended to be compensation. The company has a well documented compensation policy,
and the payments to John can be defended as reasonable.
ISSUE
Can the IRS reclassify salary as dividends without a showing that the payments were unreasonable?
ANSWER:
Yes. The IRS may reclassify even reasonable compensation if it can show that the payments were
not intended to be compensation for services rendered.
DISCUSSION:
IRC §162(a) allows a business to deduct the ordinary and necessary expenses of carrying on a trade
or business. IRC §162(a) (1) states that this includes a reasonable allowance for salaries and
compensation for personal services rendered to the company. The regulations expand on this
concept. Reg. § 1.162-7 provides “(t)he test of deductibility in the case of compensation payments is
whether they are reasonable and are in fact payments purely for services.”
In most cases, the argument between the taxpayers and the IRS involves the reasonableness of the
compensation. Landscapemasters Nursery, Inc. should be able to defend its salary payments as
reasonable. If the IRS had taken a position that the payments to Mr. Juniper were unreasonable,
then the company should fight the reclassification.
2
Sometimes, however, the argument is based on the second prong of the test. If the payments were
not intended to be compensation for services, then they are not deductible as compensation. The
Ninth Circuit has discussed this concept in a line of cases. In NOR-CAL Adjusters v. Comm., 34
AFTR2d 74-5834 (CA-9, 1974) the Ninth Circuit sustained a Tax Court ruling that bonuses paid in
proportion to stock ownership were disguised distributions of corporate profits rather than
compensation for personal services actually rendered. This was true even though total compensation
paid to the owner/employees was reasonable in amount. In Elliotts, Inc. v. Comm, 52 AFTR2d 835976 (CA-9, 1983) the Ninth Circuit stated “In the rare case where there is evidence that an
otherwise reasonable compensation payment contains a disguised dividend, the inquiry may expand
into compensatory intent apart from reasonableness.” However, the Ninth Circuit refused to find a
disguised dividend based on the simple fact that the company had no history of paying dividends.
The Elliotts case was remanded to the Tax Court to consider the reasonableness of the
owner/employee’s compensation. Finally, in O.S.C. & Associates, Inc. v. Comm., 84 AFTR2d 99-5735
(CA-9, 1999) the Ninth Circuit held that “…the corporation must separately satisfy both the
reasonableness and the compensatory intent prongs of the test. Reasonableness alone will not
suffice.” In this case, the payments failed the second prong of the test, and were properly reclassified
by the IRS as dividends.
The Ninth Circuit does not establish precedent for us in Arkansas. However, these three cases do
tell us what to expect from the Tax Court, since they were all Tax Court cases that had been appealed
to the Ninth Circuit.
We do not have sufficient facts to determine whether there is support for the IRS agent’s finding that
the payments lacked compensatory intent. In the NOR-CAL Adjusters case, the court spelled out
several factors that should be reviewed. These were:
1. Was salary paid in proportion to stock ownership?
2. Were payments made as a lump sum at the end of the year, or paid as services were
rendered?
3. Did the company pay any dividends? (but see, Elliotts—this factor alone cannot be
determinative)
4. Were bonuses paid based on cash available rather than services performed?
5. Did the company show consistently low taxable income after paying year-end bonuses?
AND
6. Were year-end bonuses paid to employees other than owner/employees?
In the event that the taxpayer wants to challenge the agent’s findings, we should review the corporate
records in light of these six factors.
3

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