In 20X1, Shark performed legal services for Sleezy, a greedy developer with a history of not paying his legal fees. Since Shark was aware of Sleezy's sordid history, Shark insisted that Sleezy pay Shark a very large retainer of $500,000 "up-front". In accordance with the requirements of the bar association, Shark placed Sleezy's retainer in a separate trust account at a local bank. As Shark performed services, he withdrew the appropriate amount of money from the account and deposited it in his personal checking account. Sleezy improperly deducted the entire amount on his 2021 tax return. In 20x2, Shark performed $300,000 worth of services to Sleezy and withdrew that amount from the trust account and deposited it in his checking account. Sleezy was dissatisfied with Shark's services and sued him to get the entire $500,000 amount refunded to him. In 20x2, Shark promptly returned the $200,000 remaining balance of the trust account to Sleezy, but refused to refund the $300,000 for the work performed. In 20x3, Shark and Sleezy reached an agreement whereby Shark would refund Sleezy $50,000 of the $300,000 billed amount. In 20x4, Shark refunded the $50,000 amount to Sleezy.

Assuming both Shark and Sleezy use the cash method of accounting, analyze the following scenarios and determine the correct accounting and tax treatment for each party:

1. For Shark (the lawyer):

   • How should Shark record the initial retainer fee in 20X1?
   • What are the implications of Shark’s withdrawals from the trust account as he performed services?
   • How should Shark account for the refund of the $200,000 and the additional $50,000 to Sleezy in 20x2 and 20x4, respectively?

Answer rating: 100% (QA)

Based on the information provided lets analyze the financial transactions between Shark and Sleezy 2... View the full answer