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John Johnson and his son, Joseph, 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. Minimum 500 words for this assignment. Use Primary sources for your research in addition to treaties....

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

den Tas tile memorandum Date - 88 teb-2020 From Raju s subject: Repayment agreement between the johnson and concert Fack Johnson and Joseph are shareholders of me copretion they are also ffreers of the corporation and members of the board of directors. In 2011 the jhorsien entered into a repayment agreement with ABC, which struplated that they could reimburse the corporation for any salary that was sequantly disallowed as a deduction by the IRS In late 2013 , the IRS recharcterized $350.00 tjosephs 30 salar and $4.00.000 af honson. Dola salary as constructive dividends disallowing fac's corporation Compensation deduction for these amounts Purssant to the doll agreement Thonson & Joseph. the amount disallowed to ABC lor Odla. Issue: How should the repayment by Jhonson & Joseph be treated to income tax paproses Disussion: Section 162.(a) allows a deduction to ordincing and net say business expenses the question is here whether the repay mond of compensation by shonson & Joseph would be deductible on ordinary & necessay business Expenses on alternatively, wheths a Credit for repayment would be allowed under sibul Reg § 116 provides that ordinary and necessary Expenses directly connected with (or pertaining to the payers torde for business are deduction from grass income as Expenses Power

had formally agreed to the board of directors they received their dola Sclay payments te are legally enforcable under state bo bus (1968). The court found that were the IRS has taken a consequently Expenses Thonso a Joseph resolution before repayment themselves In vincent touwald, uq Tic deductible as a busings Expenses the repayment deductible by jhorson as business Section isul preuts the possibility of a credit to the repaymat in lees & deduction the amount of credit allowed by & Bui a) in the year of repayment (2019) recharcterized income in aon if Jhonson & Joseph the credit would yield more tax savings than a deduction the credit apporach might be especially attractive to shorson because he is now retired and presonably facing a mouch lower tax rate in 2014 to quality for credit the amount of deduction avaliable on repayment must exceed $300 and the tax payer must show that her (or) she had on unrestricta right to the amount in question in the yeau & recepit and (2) it was late established that the taxpayer did not have that unrestricted right Thus in order to claim a credit for their repayments Joseph § jhonson must be established that doll salag agissment did not constitute a restruction on the rights to recive the income In case with tacts almost indentral to these van cleave v. a.s 83-2 Wsic 9620 52 AFTR 2d 83-6071. 718 F.2d 19.3 (CA - 6, 1983) The court held that a restruction on right to recelue income that is triggered in a stature. Preexisting consequently Thonson and Joseph can either claim a deduction lorg a Credit for repayment in 2019