S Corporation: Legal Memorandum

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Required Research Problem
S Corporations

Instructions: You should prepare a legal memorandum to your client providing tax advice on the proposal set forth here. Be sure to include citations to code sections, regulations and other authorities that you rely upon in reaching your conclusion. The paper generally runs about two to three pages and is due the last day of class or May 10, 2011..


Your client is Android Cellar who operates a successful computer consulting business as an S Corporation. Android is the sole owner of the S Corporation. He employs two workers (Geeko and Byte) who work with him in this business. Android works from home so he employs a Nanny (called Analog) to take care of his two children. He employs all of these workers through the S Corporation.

The S Corporation has been in existence for three years (including 2010) and had gross receipts/net taxable income as follows. Note that taxable income is after deducting all expenses including salaries.

Gross ReceiptsTaxable Income/(Loss)

During the year 2010 each of them worked the following number of hours for the pay as indicated:

Android (The owner) – Android worked 3,000 hours during the year. He did not take vacation but did take one week off for illness. Android’s salary from the S Corporation is $200,000. (Note that self employed taxpayers do not pay themselves salary.)

Geeko (Employee) – Geeko worked 2,000 hours during 2010 and was paid for an additional 80 hours which had accrued for vacation and illness (total of 2,080). Geeko was paid $12 per hour.

Byte (Employee) - Byte worked 1,960 hours but was paid for an additional 2 weeks of vacation (80 hours). Byte also took 1 week of leave without pay (4o hours). Byte was paid $12 per hour.

Analog (Nanny) – Android is divorced with two children over which he has joint custody. On certain days when he...
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