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1. Argosy University ACC 418 Module 4 Assignment 2
Constructive Dividends NEW
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Suppose you are a CPA hired to represent a client
that is currently under examination by the IRS.
The client is the president and 95% shareholder of
a building supply sales and warehousing business.
He also owns 50% of the stock of a construction
company. The client’s son owns the remaining
50% of the stock of the construction company. The
client has received a Notice of Proposed
Adjustments (NPA) on three (3) significant issues
related to the building supply business for the
years under examination. The issues identified in
the NPA are unreasonable compensation, stock
redemptions, and a rental loss. Additional facts
regarding the issues are reflected below:

2. Unreasonable compensation: The taxpayer
receives a salary of $10 million composed of a $5
million base salary plus 5% of gross receipts not to
exceed $5 million. The total gross receipts of the
building supply business are $300 million. The
NPA by the IRS disallows the salary based on 5% of
gross receipts as a constructive dividend.
Stock redemptions: During the audit period, the
construction company redeemed 50% of the
outstanding stock owned by the client and 50% of
the stock owned by the client’s son, leaving each
with the same ownership percentage of 50%. The
IRS treated the redemption as a distribution
under Section 301 of the IRC.
Rental loss: The rental loss results from a building
leased to the construction company owned by the
client and his son.
Use the Internet and Strayer databases to research
the rules and income tax laws regarding
unreasonable compensation, stock redemptions
treated as dividends and related party losses. Be
sure to use the six (6) step tax research process in
Chapter 1 and demonstrated in Appendix A of your
textbook as a guide for your written response.

3. Write a three to four (3-4) page paper in which
you:
Based on your research and the facts stated in the
scenario, prepare a recommendation for the client
in which you advise either acceptance of the
proposed adjustments or further appeal of the
issue based on the potential for prevailing on
appeal.
Create a tax plan for the future redemption of the
client’s stock owned in the construction company
that will not be taxed according to Section 301 of
the IRC.
Propose a strategy for the client to receive similar
amounts in compensation in the future and avoid
the taxation as a constructive dividend.
Use the six (6) step tax research process, located in
Chapter 1 and demonstrated in Appendix A of the
textbook, to record your research for
communications to the client.
Your assignment must follow these formatting
requirements:
Be typed, double spaced, using Times New Roman
font (size 12), with one-inch margins on all sides;
citations and references must follow APA or

4. school-specific format. Check with your professor
for any additional instructions.
Include a cover page containing the title of the
assignment, the student’s name, the professor’s
name, the course title, and the date. The cover
page and the reference page are not included in
the required assignment page length.
The specific course learning outcomes associated
with this assignment are:
Analyze tax issues regarding corporate
formations, capital structures, income tax, non-
liquidating distributions, or other corporate
levies.
Prepare client, internal, and administrative
documents that appropriately convey the results
of tax research and planning.
Create an approach to tax research that results in
credible and current resources.
Use technology and information resources to
research issues in organizational tax research and
planning.

5. Write clearly and concisely about organizational
tax research and planning using proper writing
mechanics.

6. Write clearly and concisely about organizational
tax research and planning using proper writing
mechanics.