...Tax Memo Facts: Doug Jones timely submitted his 2009 tax return and elected married filing jointly status with his wife, Darlene. Doug and Darlene did not request an extension for their 2009 tax return. Doug and Darlene owed and paid the IRS $124,000 for their 2009 tax year. Two years later, Doug amended his return and claimed married filing separate status. By changing his filing status, Doug sought a refund for an overpayment for the tax year 2009 (he paid more tax in the original joint return than he owed on a separate return). Issue: Can Doug and Darlene change their filing status in 2009 from married filing jointly to married filing separately two years after their original return was filed to receive a refund for over payment Authorities: Reg. Sec. 1.6013-1(a)(1) J.A Haigh v Commr, 97 TCM 1794, Dec. 57,858(M), TC Memo. 2009-140 Conclusion: Doug and Darlene cannot amend their 2009 return to change their filing status. When a couple files a joint return they can amend the return until their original due date. Analysis: Reg. Sec. 1.6013-1(a)(1) states “For any taxable year with respect to which a joint return has been filed, separate returns shall not be made by the spouses after the time for filing the return of either has expired”. James Haigh went to court to argue that he should be allowed to amend his return from married filing jointly; to married...
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...TAX FILE MEMORANDUM TO: Ted Jones, Gray Chemical Company President FROM: Yessenia Colon, Big 4 Staff Accountant SUBJECT: Grey Chemical Company Research Conclusion DATE: October 29, 2015 The Environmental Protection Agency cited Gray Chemical Company for violations of toxic waste contamination of the air and water surrounding the plant due to its toxic pesticides. The judge found Gray guilty and imposed fines of $15 million. Gray voluntarily set up a charitable fund of $8 million with the intent of bettering the environment. Gray incurred legal expenses in its defense and in setting up the foundation. The court later reduced the fine from the initial $15 million to $7 million. Gray deducted the $8 million for the foundation along with legal expenses incurred. The IRS disallowed both deductions on the grounds that these funds were a fine and in violation of public policy. In regards to your question of the deductibility of these items, $8 million for the foundation and legal expenses, and the $7 million fine §§162 (a) and (f) Trade Business Expenses states “No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.” Section 1.162-21(b), Treasury Regulations, further provides: (1) For purposes of this section a fine or similar penalty includes an amount —…(iii) Paid in settlements of the taxpayer's actual or potential liability for a fine or penalty (civil or criminal). The preceding...
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...[Memorandum] To: Thomas Collura From: Bryan Alread Date: October 6, 2014 Re: Corporate Tax Refund Claim Facts: The client used an extension on their 2010 calendar year tax return to extend their filing date to September 15, 2011. The client electronically filed their return on September 4th but was rejected by the IRS. After making some changes they resubmitted their return on September 9th and was received and accepted by the IRS on September 10th. On June 10th 2014, just under three years later, the corporation realized that they reported to much income for their calendar year 2010 tax return. Issue: What is the latest date the corporation can file a claim for a refund on calendar year 2010 tax return? Conclusion: The latest date in which the corporation can file a claim is September 9th, 2014. Analysis: Under section 6511 of the U.S Code, a claim for credit or refund of an overpayment can file a return within three years from the date the original return was filed or 2 years from when the tax was paid, whichever expires later. Under these facts we do not know when the tax for the return was paid and will go with the date the original return was filed. The corporation filed their return on September 4th but was rejected and then resubmitted their return on September 9th, which were accepted by the IRS on September 10th. In code section 6513a of the U.S. Code a return is considered filed on the latest day for that...
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...October 2, 2014 Tax File Memorandum To: Brett Ouray Facts Kathy and Brett Ouray were married in 1996. In 2014, they consider themselves completely estranged. Due to financial reasons they have decided to not get a divorce or live separately. They also do not have any legal documentation of separation and neither of them has lived outside the home for a significant amount of time. They currently reside together with their three children. They have decided that Brett has contributed more to the upkeep of their home and children than Kathy. They have also decided to file separately. Brett believes he is eligible to file for head-of-household. Question Presented Is Brett Ouray eligible to file for head-of-household? If not, how should he file? Short Answer No, Brett Ouray is not eligible to file for head-of-household. They should file a joint return to maximize tax benefits. Analysis Section 2(b) defines an individual shall be considered a head-of-household if, and only if, such individual is not married at the close of his taxable year. Section 7703(a)(2) defines that a person is considered married unless individuals are legally separated under a decree of divorce or of separate maintenance. Section 7703(b) provides that certain married individuals can file for head-of-household if individuals are not living together. Also, an individual claiming head-of-household must reside more than one-half of the year in the home and provide more than one-half of the cost of maintaining...
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...MEMORANDUM To: S. Partner, C.P.A. From: J. Accountant Date: August 27, 2012 Subject: Mr. B. Potato I FACTS Mr. B. Potato, a wealthy real estate investor, recently purchased a house on a parcel of land for $400,000. The house was appraised at a value of $300,000 and the land had an appraised value of $100,000. Mr. Potato plans to tear down the house and replace it with a new house worth $1,500,000 with the intentions of living in it personally. Paying to have the house bulldozed would cost Mr. Potato a considerable amount of money. It has been suggested to Mr. Potato to permit the Troy Fire Department rights to conduct training exercises on the land, and as part of those training exercises, to burn the house down to cinders. II ISSUES 1. Is Mr. B. Potato entitled to a charitable contribution deduction for the donation of his property to the Troy Fire Department to conduct training exercises on the land that include burning the house down to cinders? 2. Is Mr. B. Potato subject to negligence or substantial understatement penalties if the deduction is taken, but then not allowed? III CONCLUSIONS 1. Mr. B. Potato is not entitled to a charitable contribution deduction for the donation of the use of his property to the Troy Fire Department to conduct training exercises that include burning his house to ground. 2. Mr. Potato will be liable for accuracy-related penalty for negligence and substantial understatement...
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...Draft Memo Date: Preparer: Group Reviewer: Professor Subject: Qualifying Like-kind Exchange Facts: Twinbrook Corporation purchased a larger manufacturing facility for $2,100,000. Three months after Twinbrook purchased the new facility, it sold the old facility to White Flint Corporation for $2,000,000. Issue: Can Twinbrook Corporation qualify for a like-kind exchange of its manufacturing facilities? If not, under what circumstances would the transaction meet the requirements of a like-kind exchange? Authorities: IRC § 1001 (c) IRC §1031 (a)(1) IRC §1031 (a)(3) IRC Reg. § 1.1031(k)-1(b)(2)(i)) Rev. Proc. 2000-37, 2000-2 C.B. 308 Rev. Proc. 2004-51, Conclusion: Twinbrook Corporation did a transaction that does not qualify as a like-kind exchange because they obtained the new property for three months before disposing the old property. However, the exchange could qualify for the like-kind exchange if they went through an exchange facilitator. Analysis: IRC §1031 (a)(1) states that a company would not recognize a loss or gain in a qualifying like-kind exchange. In this case Twinbrook Corporation would not recognize the loss if the transaction would qualify as a like-kind exchange. Both manufacturing facilities are classified as real property; therefore, the two facilities are considered like-kind property. The problem is that the company used cash as part of the transactions and did not go through a third party intermediary; therefore, Twinbrook Corporation...
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...To: ABC Corp. XYZ, XZY 12345 From: Amit Gupta & Marc Rosenfeld Re: Federal tax consequences of cash distribution from LLC Jan 31, 2011 We appreciate the opportunity to advise you regarding this tax matter. To ensure a complete understanding between us, we use our judgment in resolving questions where the tax law is unclear or where conflicts may exist between the taxing authorities. Facts The following facts are based on your written correspondence to us, if these facts are incomplete or incorrect; please let us know as soon as possible. Helpful Paper Towels (HPT), a wholly owned subsidiary of ABC Corporation and Northwest Industries (NI) formed Northwest Helpful LLC (LLC) which was treated as a partnership for tax purposes. NI transferred its business assets valued at $412 million to the LLC in exchange for a 95% interest in the LLC, whereas HPT contributed all of its assets valued at $800 million for a 5% interest in the LLC. The newly formed LLC then borrowed $750 million from Bank of America (BOA) on the same day it received the contributions from NI and HPT and immediately transferred the loan proceeds to HPT as a special cash distribution.NI guaranteed payment of the BOA loan, and HPT agreed to indemnify NI for any principal payments NI might have to make under its guaranty. In turn, HPT loaned the cash distribution to its parent company ABC Corporation in return for a note. After the transaction, HPT’s only assets were its LLC interest, the ABC Corporation...
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...To: Dr. Green Date: 1/31/2010 RE: Tax Memo #1/Gambling Activities Issue #1 Dr. Green is a practicing physician in Chicago who, as an avid blackjack and slot machine player, travels to Las Vegas every other weekend to gamble. He would like to know what criteria are used to determine whether his gambling activities constitute a trade or business for federal income tax purposes and whether or not you think his gambling activities qualify for trade of business status. In the case of Commissioner v. Groetzinger, 480 U.S. 23 (1987), the Supreme Court "requires an examination of the facts in each case." In addition, the court ruled, "if one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business within the meaning of the statutes…." The factors which must be considered in determining whether your gambling activity constitute as a trade or business for federal income tax purposes include: * gambling activities are entered into and carried on in good faith for the purpose of making a profit; * gambling activities are carried on with regularity; * gambling activities are pursued on a full-time basis, or to the fullest extent possible if taxpayer is engaged in another trade or business or has employment elsewhere; * gambling activities are solely for the taxpayer’s own account and taxpayer does not function as a bookmaker; * taxpayer maintains...
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...Facts: In 2014 ABC Corporation, a calendar year taxpayer, properly deducted a $100,000 payment as an expense deduction. In late 2014, ABC elected S corporation status as of January 1, 2015. In March 2015, ABC received a recovery of $40,000 of the payment. The accountant for ABC asks “Must the repayment be reported as income by ABC (the S Corp) under that tax benefit doctrine?” If ABC reports income as a result of the refund, this income will be allocated to the shareholders of ABC for year 2015. Thus, the income will be taxed to taxpayers who did not received the benefit of the deduction in year 2014. How do you advise your client? Issue: Should ABC Corporation (The S Corp) report the repayment as income under the tax benefit doctrine? Analysis: The ABC (The S Corp) does not have to report the $40,000 repayment or recovery as income on their taxes. According to the Internal Revenue Code §111(a), it states: “Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.”( Internal Revenue Code §111(a)) Findings: In the case of Theodore A. Frederick v. Commissioner, it is very similar to ABC situation. The issue in the case was to decide whether to include an interest expense recovery as income by an S corporation. Frederick state that a recovery does not include taxable income if it was taxed to someone else other...
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...Research Memo Date: February 27, 2014 Preparer: Michele Reviewer: Brian Subject: Personal use of Delta Skymiles acquired from company purchased business trips Facts: Latrell recently used his Delta Skymiles to purchase a free roundtrip ticket to Milan, Italy (value $1,200). The frequent flyer miles used to purchase the ticket generated from Latrell’s business travel as a CPA. Latrell’s employer paid for his business trips, and he did not get taxed on the travel reimbursements. Issue: How much income, if any, does Latrell have to recognize because of the purchasing an airline ticket with Skymiles earned from business travel? Authorities: IRS Announcement 2002-18 Conclusion: According to the IRS Announcement 2002-18, Latrell does not need to recognize any of the frequent flyer miles ($1,200 value) used when he purchased his round trip ticket to Milan, Italy. The miles redeemed were for a free airline ticket and he did not convert the miles to cash; so there is no taxable income from the transaction. Analysis: The IRS Announcement 2002-18 states “these promotional benefits may generally be exchanged for upgraded seating, free travel, discounted travel, travel-related services, or other services or benefits. Inquiries centered on the taxability of frequent flyer miles or other promotional items that are received as the result of business travel and used for personal purposes. There are numerous technical and administrative issues relating to these benefits on...
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...TAX RESEARCH MEMO TEMPLATE June 30, 2015 Relevant Facts Robert Jones has just rendered service for a taxpayer as an expert witness in a case heard by the U. S. Tax Court. The taxpayer is requesting reimbursement for Jones’ fees and for those amounts paid to her attorney in presenting the case. Jones’ billing rate for this type of engagement is $500 per hour, the market rate for such services in his city, plus out- of- pocket expenses (e. g., auto mileage, computer charges). Specific Issues How much of Jones’ fee will the taxpayer recover? Conclusions Internal Revenue Code §7430 (c) authorizes the IRS and federal courts to award recovery of court cost to any taxpayer who prevails against the United States. The recovery of court cost includes attorneys’ fees and taxpayer’s expert witness fees to the taxpayer(s) when [1] the IRS fails to establish that its position in an administrative or court proceeding was substantially justified and [2] when the taxpayer complies with all of the following 7430’s procedural requirements. It is assumed that the following requirements are pertinent to this case: •The taxpayer did not unduly prolong the litigation •The taxpayer pursued the case through IRS administrative appeals •The taxpayer then “substantially prevailed” in the Tax Court. The taxpayer has the right to request an award of attorneys’ fees and taxpayer’s expert witness fees within 30 days by formal letter or/and at the conclusion of the proceeding; failure...
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...equity. Section 162 (f) provides that no deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law. The $8 million payment cannot be deducted because it reduced the fine for $15 million to $7 million. If the IRS allowed the deduction it would be a double benefit to the taxpayer. The Income Tax Regulations states that a fine or similar penalty includes any amount paid in settlement of the taxpayer’s conduct or potential liability for a fine or penalty whether civil or criminal. (Treasury Regulations Section 1.162-21(b) Courts generally differentiate between amounts paid as a fine and money paid as damages, with money paid as damages being deductible as an ordinary business expense. (Schnadig Corp vs. Gaines Manufacturing Co.) According to the IRS Publication 529, you can deduct legal fees related to doing or keeping your job. To deduct legal expenses, the taxpayer must be able to show that the origin and character of the claim are directly related to trade or business; an income-producing activity; or the determination, collection, or refund of a tax....
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...are refundable at any time until the services are performed and products are used. Peaceful recognizes these prepayments as income in the year the funeral goods and services are provided. Issue Should an accrual basis taxpayer record prepayments as income in the year they are received or in the year the goods and services are provided? Conclusion Peaceful does not have to recognize the payments for their “prepaid services program” as income in the year they are received because they are fully refundable until the date the goods and services are provided. Analysis Peaceful’s situation is similar to the case COMM. v. INDIANAPOLIS POWER & LIGHT CO., Cite as 65 AFTR 2d 90-394 (110 S.Ct.589), 01/09/1990, Code Sec(s) 61, where the tax court ruled that the prepayments principal purpose is to serve as security rather than a prepayment of income. Since all prepayments to Peaceful were deemed refundable, they too serve as security rather than income. Since the payments are not “advanced payments” and may be subject to refundability at any moment, they do not constitute as prepaid income. Similar to the company IPL, Peaceful derives economic benefit from the payments but “does not have the requisite "complete dominion" over them at the time they are made, the crucial point for determining taxable income.” Peaceful has the obligation to...
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...with the producers of Surprise Home Renovation to lease their home for one week. The consideration for the lease was $50,000 worth of home accessories and an all-expense paid trip to Disney World. During the lease term, Surprise Home Renovation expensed approximately $250,000 in renovating and remodeling the Sanchez home. The Sanchez’ would like to affirm the potential tax consequences of the engagement with Surprise Home Renovation. Issues 1. Should the consideration of the lease be considered rental income, prize, or neither? 2. Was the consideration received, or a portion thereof, for the leasehold rights taxable? 3. Was the compensation received for the leasehold rights adequate consideration for the lease term? 4. Is the value, or a portion thereof, of the improvements taxable to the homeowners upon reversion? Legal Discussion According of §74 of the Internal Revenue Code (IRC), gross income includes amounts received as prizes and awards, unless the income falls under a particular exception . As of 1954, §74 was enacted, in part, to overrule two cases that held a prize and award to be tax exempt. According to the Code, an exception is granted when a prize is the result of religious, charitable, scientific, educational, artistic, literary, or civic achievement. While it may be considered that the intentions of Surprise Home Renovations are civic and charitable in nature, the fact that the Sanchez’ sought the participation in the contest eliminates the...
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...To: Mr. Keith’s Estate Facts: 1. Mr. Keith and Mr. Lars were business partners for 30 years. 2. Each partner had a life insurance policy on the other partner so that the insurance proceeds could be used to purchase the deceased partner’s interest in partnership from his estate. a. Each partner was allowed veto power over any beneficiary that was chosen or changed on the life insurance policy that was on his own life. 3. Mr. Keith died recently and Mr. Lars received the $500,000 life insurance proceeds. a. Mr. Lars did use the proceeds to purchase Mr. Keith’s interest in their partnership from Mr. Keith’s estate. Issues and Analysis: Did Mr. Keith’s veto right over the beneficiary designation give him “incidents of ownership”? Reg. §20.2042-1 (c)(4) Proceeds of life insurance (being capable of changing the beneficial ownership in the policy gives Mr. Keith “incidents of ownership” based on this Reg. and IRC 2042) Would this require Mr. Keith’s estate to include the insurance proceeds of $500,000 in his gross estate? §2042 Proceeds of life insurance. (If Mr. Keith has incidents of ownership the proceeds will be included in his gross estate) Is there a problem with the life insurance proceeds being used to purchase the deceased individuals interest in the partnership from the deceased’s estate? §2042 Proceeds of life insurance (this would cause the life insurance proceeds to be included in gross estate if life insurance proceeds, even if owned by another...
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