Tax Research Assignment
Spring 2014
Your assignment is to write a professional tax research memorandum that addresses the issues shown below for the taxpayer, Jan Witherspoon.
Jan Witherspoon is a pharmaceutical salesperson for Mac Pharmaceutical Company (MPC). In 2013, MPC decided to send Jan to Black Hawk, Colorado to set up an office there. Jan has had to spend several months at the Black Hawk facility. Jan has always fancied herself an excellent blackjack player. During her trips to Black Hawk, she stays at a hotel/casino in Black Hawk and spends a considerable amount of her off-duty time gambling.
In February 2012, Jan applies for and receives a $25,000 line of credit at the hotel to be used for gambling. The line of credit lets her receive gambling chips in exchange for signing negotiable drafts payable to the hotel and drawn on Jan’s personal bank account. The hotel's practice is to hold the drafts for 45 days, at which time Jan pays them with a personal check.
By the beginning of 2013, Jan is gambling heavily at the hotel/casino. She requests and receives an increase in her credit limit to $120,000. Jan continues to lose heavily, and through accounting oversights by the hotel, her debt rises to $285,000 by October 2013. The checks that Jan writes to cover the drafts are returned for insufficient funds, and the hotel/casino immediately cuts off her credit. The hotel/casino subsequently files suit in state court, seeking repayment of the $285,000 owed on the drafts.
In early 2014, Jan negotiates an agreement with the hotel/casino in which she will settle the debt for 5 monthly payments of $25,000 ($125,000). Jan pays the $125,000 per the terms of the agreement.
In addition, to the debt owed to the hotel/casino, Jan owes First State Bank $230,000. During the current year, 2014, she is unable to make the required payments on the loan and negotiates the following terms to extinguish the debt. Jan transfers to First State ownership of investment property with a value of $85,000 and a basis of $48,000, and common stock with a value of $55,000 and a basis of $74,000. Jan also pays First State $8,000 cash, and First State forgives the remaining amount of debt. Before the agreement, Jan's assets are $220,000, and her liabilities are $410,000.
Required: Write a tax research memorandum addressing the items discussed above.
NOTE:
Tax Research Memo Format:
• Title your memo either generally, e.g., “Research Memorandum” or more specifically, e.g., “name of the client and the specific tax situation at hand”
• Address your memo to the client file [include the standard Date, To, From, and Re headings]
• Organize the body of your memo using the following subheadings:
o Facts
o Issue(s)
o Conclusion(s)
o Analysis/Discussion
• The Facts section should clearly and concisely summarize all relevant facts that may affect the tax outcomes. In particular, include dollar amounts, dates, and names of all parties to transactions.
• The Issues section should include numbered issues if there is more than one. Write each issue as a question. Include enough of the facts to give context to the question. For example, “How much, if any, of the $3,000 John Doe paid for attending a Real Estate conference cruise from Miami to Galveston can he deduct as a business education expense?” is better than “What are the tax consequences of these facts?”
• The Conclusion(s) should be numbered to correspond to the Issue(s). State a definite conclusion, if possible, for each Issue. If a definite conclusion is not possible, for example, because you are researching alternative ways to plan a transaction, then state the conclusion that will be appropriate IF each alternative is taken.
• The Analysis/Discussion section should be organized to correspond to each issue if there is more than one.
Each numbered subsection in the Analysis section should be organized as follows:
o Summarize the relevant Code section. For example, if you are analyzing a deductibility of a business expense, begin by summarizing the rule in §162(a). Paraphrase, do not copy and paste either from the Code or from commentary.
o Summarize any other relevant law sources such as regulations, Revenue Rulings, and judicial opinions, if any. The summary of the law—Code and other sources—can usually be done in a single paragraph unless the issues are very complicated or there is a large volume of sources to consider.
o Include a second paragraph in which you Apply the law to the client’s facts or planned transactions. This application should bridge between the law and your conclusion regarding the issue.
• Citations: use correct citation format. Always cite the smallest subdivision of the Code or regulation that contains the language you are referring to, e.g., §1031(c)(1)(B) instead of §1031. DO NOT CITE COMMENTARY—commentary, such as the prose contents of RIA’s Federal Income Tax Reporter, is not a primary source of the tax law and thus is not authoritative. Read and use commentary to aid your understanding of the law and as a prelude to investigating primary sources such as the Code, regs, rulings, and cases.
• Ask questions as needed!
• See the Sample Research Memorandum
Answer will be sent by email as attachment.
