You Decide-Week 4
ACCT553

John Smith tax issues:
a. How is the $300,000 treated for purposes of federal tax income?
Mr. Smith, in regards to your $300,000 earnings for the successful litigation of your clients case, this will be treated as current year earnings. The payment fits all three doctrines of income starting with the economic doctrine which states “all income from whatever source derived” IRC Code Sec. 61 (a). The constructive receipt doctrine, outlining constructive receipt of payments, allows us to treat the payment for this current year only even though it was income from a case that lasted two years. “Income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.” Reg. §1.451-2. Since these earnings were under the restriction of a successful verdict for your client, the payment could not be considered as earned any sooner than now. Since you operate your legal practice through an LLC, the assignment of income falls to the Limited Liability Corporation of which you are the primary member. Although the income is assigned to the LLC, there is only one layer of income tax, yours, since the LLC is treated as a conduit entity. All income will pass through to you as ordinary income, after business exclusions and deductions of course. The LLC is a disregarded entity and for federal tax purposes the activities of the business will be treated as if you were a sole proprietor (IRC Code Sec.752). This eliminates the double taxation problems common in C corporations. The earnings from your case will be subject to self-employment tax of 10.4% on the first $106,800 (FICA) and also 2.9% on the total amount (Medicare). Therefore, the $300,000 attorney fee for the case is treated as gross income for the LLC, passed through to your individual taxes and tax at the federal tax rate as a sole