Explain Why the Taxpayer in Each of the Following Situations

question 2

Essay

Explain why the taxpayer in each of the following situations either does or does not have a Claim of Right to the income received.
a.Thomas works as a purchasing agent for Local City Government. During the current year, he takes a $5,000 kickback from a supplier seeking a lucrative contract with Local City. The kickback is illegal under State law and will have to be repaid to Local City if it is ever discovered.
b.Bernice is an agent for Drew, quarterback of the LA Tigers. During the current year, Bernice negotiates a new contract for Drew that includes a $5,000,000 signing bonus. Bernice receives the signing bonus from the Tigers and places it in her business account. As per her contract agreement with Drew, Bernice writes a check for $600,000 to Drew's mother, gives Drew a check for $3,900,000 and retains the remaining $500,000 as her standard 10% fee.
c.Karl, an attorney, is hired by Dominic Manufacturing Company to represent it in a lawsuit. Because the lawsuit will likely drag out for a number of years, Karl requests that Dominic Manufacturing pay him a retainer representing two years of services. Dominic Manufacturing agrees to pay the $150,000 retainer; however, Dominic insists that Karl agree to refund, pro-rata, any of the retainer fee not yet earned should Dominic decide to terminate their relationship.

---

Definitions:

High-Low Method

A technique used in managerial accounting to estimate fixed and variable costs based on the highest and lowest levels of activity.

Variable Utilities Cost

The portion of utility expenses that varies with the level of business activity or production volume.

High-Low Method

A technique in cost accounting to estimate fixed and variable costs based on the highest and lowest levels of activity.

Cost-Volume-Profit Analysis

An accounting method used to estimate how changes in costs, sales volume, and price affect a company's profit.