Question

John Johnson and his son, Joseaph, own all outstanding stock of ABC Corporation. Both John and Joseph are officers in the corporation and, together with their uncle, Sam, comprise the entire board of directors. ABC uses the cash method of accounting and has a calendar year-end. In late 2011, the board of directors adopted the following legally enforceable resolution (agreed to in writing by each of the officers):

o Salary payments made to an officer of the corporation that shall be disallowed in whole or in part as a deductible expense for Federal income tax purposes shall be reimbursed by such officer to the corporation to the full extent of the disallowance. It shall be the duty of the board of directors to enforce payment of each such amount.

In 2017, ABC paid John $800,000 in compensation and Joseph received $650,000. On an audit in late 2018, the IRS found the compensation of both officers to be excessive. The IRS disallowed deductions for $400,000 of the payment to John and $350,000 of the payment to Joseph. The IRS recharacterized the disallowed payments as constructive dividends. Complying with the resolution by the board of directors, both John and Joseph repaid the disallowed compensation to ABC Corporation in 2019. John and Joseph have asked you to determine how their repayments should be treated for tax purposes. Joseph is still working as a highly compensated executive for ABC, while John is retired and living off his savings.

Prepare a memo for your firm’s client files describing the results of your research. Use the format below to prepare your memorandum. Use the tax resources available to by the University on Titanium (CCH and/or RIA Checkpoint.)Use Primary sources for your research in addition to treaties, etc. Minimum 500 words for this assignment

Tax Research Memorandum Sample Format

Date
TAX FILE MEMORANDUM

FROM: John Doe
TO: Company TAX FILE SUBJECT:

Facts:
Specific Issues:

Conclusion:
Law and Analysis:

Preparer ________                                Reviewer ________                               Partner ________

Answer 1

Refer the below images for the above asked question, in a detailed way of explanation.

Answer: Tax File Memorandum Date : November 5, 2019 FROM: ASHOK Lomar M SUBJEG : Repayment agreement between the Johnson and ABC Corporation for any salary that was con FACTS : Johnson and Joseaph are the sole shareholders of ABC corporation. They are also officers of the corporation and members of the board of directos. In poll, the Johnson entered into a repayment agreement with ABC, which stipulated that they would reimburse the corporation for any salary Subsequently desallowed as a deduction by the IRS en late 208, the ERS recharacterized $350000 of goseaph's 2017 Salary and $400800 of Johnson's 2017 Salary as Constructive dividends I disallowing ABC'S Corporation compensation deduction for these amounts. Pursuant to the 2011 agreement, Johnson & Joseaph repaid the amount disallowed to ABC in 209. Issue: How should the repayment by Johnson & Joreaph be treated for income tax Porposes 2 Discussion : Section 162(a) allows a deduction for ordinary and necessary bosiness expenses. The question is here whether the repayment of compensation by Johnson & Joseaph would be deductible as an ordinary dinary lo is necessary necessary business business expense , (08), alternately, whether a credit for the repayment would be allowed under & 1341. Reg § 1. 162-1 provides that ordinary and necessary expenses directly connected with cor) pertaining to the tax payer's trade con business are deductible from gross income as bosiness expenses.

Johnson & Joseaph had formally agreed to the board of directors resolution before they received ther 2017 Salary payments. The repayments themselves were legally enforceable under state law an Vincent E.Oswald, 49 T.C. 645 (1968), the oust found that repayments by the tax payer in an almost identical axonstance were dedutible as a business expeose. The IRS has taken a Similar position in Rev. Rol 69 - 115, 1969-1 B.so. Conreaquently, the repayments are deductible by the Johnson as a business expense- Section 1341 presents the possibility of a exedit for the repayment an liew of a deduction. The amount of the credit allowed by $ 1241 (a) in the year of repayment (2019) would be equal to the day that was paid on Vecharacterized Pncore in 2017. It Joseaph lovs Johnson tax rate in 217 was higher than it is in 2019, the credit would field more dax Savings than a deduction. the credit approach might be especially attractive to Johnson because he is now yetired and presumably taking a much lower tax rate an 2019. To goatty for the exedit , the amount of deduction available on repayment must exceed $7000 and the tax payer most show that co) he cor) she had an unrestricted right to the amount in apustion in the year of receipt and as it was late established that the taxpayer did not have that onrestricted right. Thos in order to claim a Credit for ther repayments Joseaph & Johnson most establish that the 201 salary agreement did not constitute a restriction on the right to recove the income in a case with facts almost identical to these, Van cleave &. U.S., 83-2 USTC 9620, 52 AFTR 2d 83-6071, 718 Fad 193 (CA-6, 1983), the court held that a restriction on the right to receive Income that of triggered in a future year (e.g., when compensation must be put porsuant to a preexisting agreement) does not limit the availability of a § 1341 credut consequently, Johson and Joseaph can either claim a deduction corsa eredit for the repayment in 2019.