John & Jane Smith

ABC CPA

John Smith, Esq LLC.

9/28/2012

Re: Tax Issues

Dear Mr. & Mrs. Smith,

It was a pleasure to meet with you last week. This memo is in regard to your concerns that you

mentioned during our meeting and my recommendation for each one. Please review this memo

and call me if you have any questions.

1) John Smith tax issues:

a. How is the $300,000 treated for Purposes of Federal Tax income?

Gross income means” all income from whatever source derived, including (but not limited to the

following items: Compensation for services, including fees, commissions, fringe benefits, and

similar items…..”

(http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._61._Gross_income_define

d#Location_in_Internal_Revenue_Code)

According to IRC Publication 3402 Taxation of Limited Liability Companies “an individual

owner of a single-member LLC classified as a disregarded entity is not an employee of the LLC.

Instead, the owner is subject to tax on the net earnings from self-employment of the LLC which

is treated in the same manner as a sole-proprietorship.”

(http://www.irs.gov/publications/p3402/ar02.html#en_US_publink1000205890).

The $300,000 is his active income. It is subject to self-employment income tax. Also, based on

the cash method accounting sole proprietorship, your fee/ compensation will be taxed when you

receive it.

b. How is the $25,000 treated for purpose of Federal tax income?

According to IRC Sec.104 (a) (2) “Any winnings in a personal injury lawsuit that covers the

treatment of physical injuries are not taxable except for attorney fees which are taxable.”

Also, Code Sec. 162 states “For any expenditure to qualify as a deductible, it must be related to

carrying on a trade or business activity with profit motives and significant taxpayer’s

involvement; it must be ordinary and necessary; it must be reasonable; and it must be paid during

the taxable year.” (http://www.irs.gov/Tax-Professionals/Tax-Code,-Regulations-and-OfficialGuidance)...