Scott and Kourtney Smith are married and have been clients of Footem and Filem, LLP (F&F) for the past few years. Kourtney is an elementary school teacher. Scott owns a real estate business, Smith Realty, which he operates as a sole proprietorship. In February of this year, Scott was trying to sell a very expensive home to a buyer with very little credit history. The large commercial banks that Scott’s buyers normally use to obtain mortgages refused to issue a loan to this buyer. However, Scott was determined to make this sale happen so he could collect a sales commission amounting to $50,000. Scott has a friend named Larry Belfort who is a loan officer at a small bank in Tuscaloosa, Alabama. After his buyer was denied credit by several large commercial banks, Scott agreed to “split” his commission 50/50 with Larry as long as Scott’s buyer could get a mortgage from the bank to complete the sale of the home. Larry agreed, but told Scott that it would be illegal under Alabama law for him to accept the $25,000 bribe. Instead, Larry asked that Scott donate the money to the University of Alabama to establish a scholarship in Larry’s honor. Larry was already planning to donate $25,000 to the university anyway, but this deal with Scott saved Larry the time and expense of doing it himself. Based on the facts above, how much of the $25,000 donated to the University of Alabama, if any, can Scott deduct for federal income tax purposes? In addition, how much of the $50,000 total sales commission must Scott recognize in gross income for federal tax purposes? Assume you work for F&F and Scott and Kourtney Smith are your clients. Prepare a brief research memo, complete with citations and analysis of primary authority, to support your conclusions. Remember that Scott and Kourtney are not professional tax preparers, so it is important that you explain your position in a clear and concise manner that is not overly technical (i.e., do not copy and paste excerpts from primary authorities and call it a day).

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A person is governed by Federal Income Tax Rules whether the income earned by him is legal or illega... View the full answer