Tax Paper

Dear Mr. and Mrs. Smith,

Below I have elaborated on the following tax concerns as you both have mentioned to me, I have provided the following recommendation for each and given the tax rules that support my recommendation.

John, due to winning the lawsuit that you were working on for 2 years, this had resulted in a $300,000 fee payment and $25,000 for recovery of expenses that were paid up front. In reference to your concern of how both of these transactions should be treated for federal tax purposes, the fee payment of $300,000 should be included as a part of your gross income and the $25,000 should be treated as a deduction due to this being an expense of the business. Furthermore, this business being an LLC, the entity should be treated as conduit entity, whereas the income passes to it owners, eliminating the double taxation as that of a corporation, but you have the choice to be taxed as a corporation.

“The economic benefit doctrine addresses the "what" and the constructive receipt doctrine addresses the "when." Any amount of compensation granted or paid to the individual for services rendered, be it cash, bonus, profit sharing, compensation in kind, or any other ingenious method of payment, must be included in gross income. Gross income is defined under the broad language of Code Sec. 61 (a) of the Internal Revenue Code as "all income from whatever source derived." Thus, taxable income may consist of cash, receivables, property, land, or any other form of economic benefit. (See chp 4, p.3)”

These are some items to remember that are included in gross income for further use:

Section 61(a) of the Code simply lists fifteen items which must be included in gross income. Remember, gross income is in no way limited to these fifteen income items.

• 1.Compensation for services, including fees, commissions, fringe benefits, and similar items

• 2.Gross income derived from business

• 3.Gain derived from dealings in property

• 4.Interest

• 5.Rents

• 6.Royalties

• 7.Dividends

• 8.Alimony and separate maintenance payments

• 9.Annuities

• 10.Income from life insurance and endowment contracts

• 11.Pensions

• 12.Income from discharge of indebtedness

• 13.Distributive share of partnership gross income

• 14.Income in respect of a decedent

• 15.Income from