From: Ailing Shang, CPA 320 King Street Honolulu, HI 96822 To: Finch Construction Company 300 Harbor

Drive Vermillion, SD 57069

Dear Finch Construction Companys management,

I appreciate the opportunity to advise you regarding this tax matter. To ensure a complete understanding between us, I am stating the related information about the advice that I will be presenting and the facts you provided to me.

Responsibility

My responsibilities are to follow what the tax law imposes to taxpayers. Tax professionals will assist you on tax matters with professional guidance. However, I cannot guarantee the outcome in the event the IRS challenges my opinion. I use my judgment in resolving questions where the tax law is unclear or where conflicts may exist between the taxing authorities. Unless you instruct me otherwise, I resolve such questions in your favor whenever possible. To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication including

any attachments is not intended, or written to be used, and cannot be used for the purpose of avoiding tax related penalties under the Internal Revenue Code.

Facts

Finch Construction Company provides the carpenters it employees with all of the required tools. However, the company believes that this practice has led to some employees not taking care of the tools and to the mysterious disappearance of some tools. The company is considering requiring all of its employees to provide their own tools. Each employees salary would be increased by $1,500 to compensate for the additional cost. Finchs management is expecting improvements in equipment management from its employees.

Issues

As Finchs management expressed in their letter to Ailing Shang CPA Firm, because of disappearance of company tools and other equipment issues. Finchs management decided to require all of its employees to provide their own tools to performing their services. As a consequence, employees are required to purchase carpentering tools to perform their duty. By resolving this issue, Finchs management will increase its employees salary by $1,500 to compensate for the additional cost. This action will affect employees financial report when tax return is required to file.

Analysis

As tax adviser, we have spend countless hours trying to develop techniques to achieve tax-exempt status for income. However, employee benefits planning are greatly influenced by the availability of certain types of exclusion. After extensive research, we have found the following tax-exempt can be applied to your salary increase decision for your employee. By Internal Revenue Services definition on Fringe Benefit, a fringe benefit is a form of pay for the performance of services. Any fringe benefit you provide to your employee is taxable and much be included in the recipients play unless the law specifically excludes it. According to Internal Revenue Services Publication 15-B Section 2 Working Condition Benefits states that this exclusion applies to property and services you provided to an employee so that the employee can perform his or her job. It applies to the extent the employee could deduct the cost of the property or services as a business expense or depreciation expense if he or she had paid for it. This exclusion also applies to a cash payment you provide for an employees expenses for a specific or prearranged business activity for which a deduction is otherwise allowable to the employee. Based on the rules listed above, the increases of employees salary are excluded from gross income. However, as an employer, you must require the employee to verify that the payment is actually used for those expenses and to return any unused part of the payment. For this gross income exclusion, treat the following individuals as employees: A current employee. A partner who performs services for a partnership.

A director of your company. An independent contractor who performs services for you.

Calculation and Recommendation

Consider the case of an employee who is going to receive a salary increase of $1,500 per year. If the employer requires employees to provide their own tools for service in a manner that qualified for exclusion treatment but increased the employees salary by $1,500, the employees after-tax and after-tax-exempt income would increase at cost to the employer. Please provide us the employees salary amounts and marginal tax rate, thus we will be able to calculate the impact of your decision on employees tax liability and employers tax liability.

Best regards, Ailing Shang CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended, or written to be used, and cannot be used for the purpose of avoiding tax-related penalties under the Internal Revenue Code.