Below you will find an example of a corporation 1120S formal protest we sent to
the IRS on behalf of a client. We have entered blanks to protect the identity of
the client.
April 16, 2009
Internal Revenue Service
Group Manager
Attn: --02AWN
9450 Koger Blvd., Rm 201
St. Petersburg, FL 33702-2414
Re: ------- ------- Enterprises, Inc.
Taxpayer Identification Number: **-*******
Examination for Tax Years Ended: December 31, 2004
December 31, 2005, December 31, 2006, and December 31, 2007
Dear Mr. -------,
------- ------- Enterprises, Inc. hereby protests the proposed adjustments to income
as set forth in paragraph 6 below. This protest is filed with respect to the 30
Day Letter (Letter 91 5(DO)) dated March 17, 2009, and the accompanying explanations.
Taxpayer reserves the right to file one or more supplements to this protest.
The following information is submitted in support of this protest:
1.Taxpayer’s name, address and identification number:
------- ------- Enterprises, Inc.
400 ------ ---- Pt.
#---
Sarasota, FL 34236
TIN: **-*******
Taxpayer is a calendar year-end taxpayer. Taxpayer filed its federal income tax
return on Form 1120S.
2.Date of the 30 Day Letter: March 17th, 2009.
3.Taxable years at issue: 200412, 200512, 200612, 200712
4.Request for conference: Taxpayer requests a conference with the Internal
Revenue Office of Appeals in the Plantation, FL office with respect to the findings
of the examining Revenue Agent.
5.Request to be present at, and receive documents relating to, certain Appeals
communications: In accordance with section 1001(a) of the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. No. 105-206, Taxpayer requests to
be present at all communications between the Internal Revenue Service Examination
Division and the Appeals Division with respect to this matter. Taxpayer requests
advance notice of such communications so that Taxpayer can arrange to be present.
In addition, Taxpayer requests to be present at all communications between Chief
Counsel representatives and the Appeals Division with respect to this matter. Taxpayer
requests advance notice of such communications so that Taxpayer can arrange to be
present. Taxpayer further requests copies of all written communications and summaries
of any oral communications between the Internal Revenue Service Examination Division
and the Appeals Division with respect to this matter. Finally, Taxpayer requests
copies of all communications, whether written or written summaries of oral communications,
between the Examination Division and any third party that occurred during the course
of the examination of Taxpayer.
6. Taxpayer does not agree with, and hereby protests, all proposed adjustments for
his tax years ended 12/31/2004, 12/31/2005, 12/21/2006 and 12/31/2007 in the 30
Day Letter including those set forth below:
Adjustments to Income
Tax Year 200412:
Net ordinary gain (loss) from Form 4797, Part II - $30,886
Other Income (loss) – Barter - $1600
Compensation of Officers - $(51,796)
Other deductions - $51,796
Depreciation - $1065
Tax Year 200512:
Other Income (loss) – Barter - $3242
Compensation of Officers - $(120,631)
Other deductions - $57,866
Depreciation - $(434)
Tax Year 200612:
Compensation of Officers - $(125,155)
Other deductions - $50,566
Depreciation - $(694)
Tax year 200712:
Compensation of Officers - $754,414)
Other Deductions - $659,937
Depreciation - $(9611)
Gross receipts or sales - $(268,748)
Advertising - $5392
Salaries and wages - $(19,771)
Repairs and maintenance - $2529
Taxes and licenses - $9228
Interest - $274,583
Rents - $2500
General Background
------- ------- Enterprises, Inc. (aka taxpayer) should be given the opportunity
to present its proper income and expenses for tax years ended 2004, 2005, 2006 and
2007
Issue 1: Compensation of officers
Was the amounts reported as compensation of officers reasonable?
Facts
------- ------- is the 100% shareholder of this taxpayer. Mr. Edwards provides public
speaking services for the taxpayer which generates all of the income for the taxpayer.
Mr. ------- had been working for Wealth Intelligence Academy (aka WIA)since 2004.
In late 2006, WIA adopted a new brand called “Rich ---- Education”. Mr. -------
started up the brand by speaking on behalf of ------ -------. Mr. ------ wrote a
book called “Rich ---- Poor ----”. Mr. ------- is a wealthy real estate investor.
He wrote this book to teach people how the wealthy and the poor view money. The
book provided the psychology behind wealth, but not the how-to. This book had been
on the New York Times best seller listing for 5 years and as a result, people were
hungry for Mr. ------ to teach his secrets. In 2006, Mr. ------, Mr. ------- and
others involved in the training sessions saw thousands of people and taught them
how to invest in their future. They have no burned through a great number of people
and now are teach fewer and fewer people each week.
Mr. ------- has always relied upon his accountants to recommend the amount of salary
the taxpayer should allocate to him. Mr. ------- relied upon his accountant’s assessment
of the weak business climate when they determined what should be reported by the
taxpayer as reasonable officer’s compensation.
Law
(a) IN GENERAL
There shall be allowed as a deduction all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade
or business, including--
(1) a reasonable allowance for salaries or other compensation for
personal services actually rendered;
Analysis
The IRS calculated that a reasonable officer’s compensation should be 51% of gross
receipts and then applied that percentage to each tax year. That percentage was
calculated by using 2004 as the base line. The IRS combined the $25,967 that was
reported as officer’s compensation to the amount of personal expenses that were
disallowed during the audit ($51,796). That total amount of $77,763 was determined
to be 50.240% of that years gross receipts ($154,784).
An analysis of the percentage of officer’s salary to the gross receipts are as follows:
Reported by taxpayerPer the IRS
Tax year
200417%50.24%
200522%50%
2006 9%50%
2007 0%50%
Conclusion
We believe that the IRS has been arbitrary and capricious in their determination
of reasonable officer’s compensation. It is not reasonable to assume that the same
salary percentage should be carried forward to all of the subsequent tax years.
The business climate changed considerably after 2004. In addition, Mr. ------- association
with Mr. Kiyosaki in 2006 allowed the taxpayer to reap the benefits. It would be
unreasonable to assume that Mr. ------- efforts alone resulted in the significant
increase in revenues.
While we agree that officer’s compensation should be a reasonable amount, we disagree
that 50% is a correct calculation. We believe that the officer’s compensation reported
in 2004, 2005, and 2006 is reasonable in amount. In addition, we believe that an
amount 10% of gross receipts is a reasonable amount to be allocated to the officer’s
compensation in 2007.
Issue 2: Other Deductions
Is the taxpayer entitled to the other deductions claimed on the tax returns for
all of the years under audit?
Fact, Law, Analysis and Conclusion
IRC Section 162 states in part:
(a) IN GENERAL
There shall be allowed as a deduction all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade
or business, including--
(1) a reasonable allowance for salaries or other compensation for
personal services actually rendered;
(2) traveling expenses (including amounts expended for meals and
lodging other than amounts which are lavish or extravagant under the
circumstances) while away from home in the pursuit of a trade or
business; and
(3) rentals or other payments required to be made as a condition to
the continued use or possession, for purposes of the trade or
business, of property to which the taxpayer has not taken or is not
taking title or in which he has no equity.
The taxpayer is claiming that the amounts deducted as other deductions are reasonable,
have been properly supported by documentation and protest the IRS’ determination
for all of the years under audit. In addition, the taxpayer requests that for those
items that are determined not to be 1120S expenses, but more appropriately for Mr.
Edwards’ 1040, the taxpayer requests that these expenses be allowed on Mr. -------'
Form 1040 for the appropriate tax year.
Issue 3: Advertising Expense
Is the advertising expense deducted on the 2007 tax return properly disallowed?
Facts, Law, Analysis, Conclusion
The IRS determined that the amount identified as advertising expense was actually
contributions totaling $5392. The taxpayer requests that this amount be allowed
as a deduction on Mr. -------’ Form 1040 for tax year 2007.
Issue 4: Repairs & Maintenance Expense
Is the repairs expense deducted on the 2007 tax return properly disallowed?
Facts, Law, Analysis, Conclusion
The IRS determined that the amount identified as repairs as not being 1120S expenses
but rather Form 1040 expenses.. The taxpayer requests that this amount be allowed
as a deduction on Mr. Edwards’ Form 1040 for tax year 2007.
Issue 5:Tax Expense
Is the tax expense deducted on the 2007 tax return properly disallowed?
Facts, Law, Analysis, Conclusion
The IRS determined that the amount identified as tax expense as not being 1120S
expenses but rather Form 1040 expenses.. The taxpayer requests that this amount
be allowed as a deduction on Mr. -------’ Form 1040 for tax year 2007.
Issue 6: Rent Expense
Is the rent expense deducted on the 2007 tax return properly disallowed?
Facts, Law, Analysis, Conclusion
The IRS determined that the amount identified as rent expense as not being 1120S
expenses but rather Form 1040 expenses.. The taxpayer requests that this amount
be allowed as a deduction on Mr. -------’ Form 1040 for tax year 2007.
___________________________________
As noted above, Taxpayer reserves the right to file one or more supplements to this
protest, as appropriate. We would be pleased to discuss with you a schedule for
resolving this appeal promptly.
Please continue to direct all future correspondence concerning this matter to:
Jeffrey Galante
JG Tax Group
Respectfully submitted,
By:
Jeffrey Galante
Enrolled Agent
JG Tax Group
REPRESENTATIVE’S PERJURY DECLARATION
Under penalties of perjury, I declare that this protest was prepared under my supervision
and although I do not know of my own knowledge if the facts contained herein are
true, on the basis of the information furnished me, I believe them to be true and
correct.
By:
Jeffrey Galante
Enrolled Agent
JG Tax Group
