Tax Project Memo

Inter Office MemorandumPalmer, Nicholas and Woods, CPAs
To:
Tax Staff (ACC 410/610, Sec. 1003)
From:
Tax Senior Partner
Date:
March 18, 2024
Subject:
Bogie Golf, Inc. – Golf Course Construction Cost/S Corporation
Strictly Confidential
Our firm recently obtain Bogie Golf, Inc. as a new audit and tax client. Bogie was
incorporated under Nevada law in January 2022. Bobby Nicholson, a former PGA
touring professional is the controlling shareholder and Chief Executive Officer.
Bogie is a calendar year taxpayer. The stock ownership of Bogie is as follows:
Bobby Nicholson
Whiff Mulligan
Hi-Low Venture Capital Partners
1,400 shares
400 shares
200 shares
In April 2022, Bogie acquired a track of desert land north of Las Vegas for the
purpose of constructing and the operating a 36-hole golf course. Construction of
the course started in the Spring of 2023 with an estimated completion date of May
1, 2024.
I recently had lunch with Whiff Mulligan. Whiff is Bogie’s Chief Financial
Officer. Whiff is also responsible for all tax matters. Whiff has several income tax
questions for our firm pertaining to the treatment of various construction
expenditures, and Bogie becoming an S Corporation.
1
Issue 1:
The construction project will incur substantial earth-moving costs in creating the
landscape desired for the course. The fairways will have planted grass, but the
greens will be “modern greens” containing sophisticated drainage systems. The
greens must be replaced when the underlying drainage systems are replaced. Whiff
specifically wants to know what costs are expensed and what costs are capitalized,
either as part of the land or as depreciable assets?
Issue 2:
As stated above, Bogie is incorporated under Nevada law. It is a C corporation for
federal income tax law1. Bogie files a Form 1120, U.S. Corporation Income Tax
Return. Given the start-up nature of the Bogie’s business to date, it has operated at
a loss. Once the course opens in 2024, Whiff expects Bogie to be very profitable
beginning in 2025. Thus, Bobby Nicholson has requested Whiff to discuss with our
firm the possibility of Bogie becoming an S Corporation for income tax purposes
effective January 1, 2025.
Whiff is somewhat unclear as to the benefits to Bogie and its shareholders if Bogie
becomes an S Corporation. He wants our advice as to the what the benefits are to
the shareholders and to Bogie if Bogie is an S Corporation? In addition, Whiff wants
to know what are the requirements for Bogie to be an S corporation, and whether
Bogie can qualify to be an S corporation on January 1, 2025?
The Engagement:
Whiff has engaged us to prepare a memorandum for him documenting our tax
advice for the two issues.
I need you to research these issues and draft a memorandum citing your tax
authorities, the proper income tax treatment, and recommendations for the 1) golf
course fairways and greens construction costs, and 2) S corporation status for
1 As a C Corporation, once Bogie is profitable, it will pay income tax at a rate of 21% on its taxable income. If it
wants to distribute its profits to its shareholder, it will make a nondeductible dividend payment to the
shareholders. The shareholders will then include the dividend in their taxable income. Thus, double tax on the
corporate taxable income.
2
Bogie. Whiff has requested the memorandum no later than April 8, 2024. Thus, I
will need you to provide me with your memorandum for my review no later than
April 1, 2024.
Additional Instructions
1. You are permitted to work in groups of up to 4 students. The memorandum
you submit will need to include the names of all group members. Group
members will receive the same grade.
2. Your memorandum should be e-mailed to me at don.jones@unlv.edu no
later than 11:00PM on Monday, April 1, 2024. The memorandum will be
late if received after that time and date, and the grade on the memorandum
will be reduced by 50%. Failure to turn in the memorandum will result in an
automatic reduction of one letter grade for the course.
3. Use RIA Checkpoint as a research tool.
4. The memorandum should follow the Facts, Issue(s), Conclusion(s), List of
Authorities, Support and Analysis, and Action to be Taken format as we
discussed in class.
5. The memorandum must be typed, double-spaced, 12 font, Times New
Roman, using Microsoft Word or other word processing system. Your
research memo project must be in one document file using the following
prefix: “410.03.your last name(s).Researchproject.Sp2024.docx”. For
example, if Whiff Mulligan and I work as a group, our file name would be:
410.03.mulligan.jones.Researchproject.Sp2024.docx. If you do not follow
these instructions, your memo will be returned to you which could result in
your memo being submitted late.
6. The memorandum should be approximately 2 to 4 pages in length.
7. The project will be graded using the following grading rubric:
3
ACC 410/610, Federal Taxation
Tax Research Project Grading Rubric
Spring Semester, 2024
Students:
5
1. Format and appearance
2. Grammar, sentence, and paragraph structure
3. Identifying and evaluating sources of tax
authorities
4. Analysis and application tax authorities to facts to
support conclusion(s)
5. Content and professionalism
Total Points
Comments:
4
4
3
2
1
Preparation of a Tax
Research Memorandum
Spring Semester, 2024
A`
Organization of a Tax Practice
Steps in the Tax Research Process
Step 1: Establish the Facts
Significant Facts – Examples:
▪ Client’s tax entity
▪ Client’s personal (family) situation
▪ Client’s marginal tax rates
▪ Client’s legal domicile/citizenship
▪ Motivation for the transaction
▪ Related party involvement
▪ Entity’s/business’ special tax status
▪ Whether transaction is proposed or completed
Step 2: Identify the Issues
▪ Fact issues
•
Information with objective reality
Dates
• Amounts
• Reasonableness, intent, or purpose
•
▪ Law issues
•
Unclear as to what and/or how tax law applies
Possible conflict between IRC sections or other sources of law
• No provision found that addresses the client’s specific issue
•
▪ Simple situations can generate many research
issues
▪ New issues may arise when researching the
original problem
Step 3: Locate Authority
▪ Primary authority
• Statutory – Internal Revenue Code
• Administrative – Treasury Regulations, Rulings
• Judicial – Court Cases
▪ Secondary authority
• Annotated services
• Topical services
• Federal Tax Coordinator (RIA Checkpoint)
• Court reporters
• Tax journals
▪ Do Not Cite Secondary Authority in Memo
Sources of Federal Tax Law
▪ Statutory Sources
▪ Judicial Sources
• U.S. Constitution
• U.S. Supreme Court
• Tax Treaties
• U.S. Court of Appeals
• Internal Revenue Code
• U.S. District Court
▪ Administrative
Sources
• Treasury Regulations
• Revenue Rulings
• Revenue Procedures
• Miscellaneous IRS
publications
• U.S. Court of Claims
• U.S. Tax Court
• Small Cases Division
Step 4: Evaluate Authority (1)
▪ Different authorities may suggest
different treatments (e.g., court
decisions vs. IRS pronouncements)
▪ Different authorities have different
precedential (weight) values
Involves reading and critical analysis
of relevant secondary and primary
authorities
Step 4: Evaluating Authority (2)
▪ Internal Revenue Code
▪ Regulations
may provide example.
• seldom held to be invalid
•
▪ Revenue Rulings and Revenue Procedures
frequently modified or held invalid
▪ Higher court decisions receive additional
precedential weight
•
District and Circuit Court opinions directly affect only taxpayers in
those jurisdictions
▪ A well-written court case opinion contains a wealth
of information on tax issues:
Identifies pertinent tax law
• States competing interpretations of the law
• Identifies critical facts and issues
•
Federal Court System
▪ A three-tiered system:
U.S. District Courts.
2. U.S. Courts of Appeal.
3. The United States Supreme Court.
1.
Federal Courts of Appeal & District
Courts
Step 5: Develop Conclusions
and Recommendations
▪ May have no single “best” alternative
• Alternatives must be considered
• Client’s preferences must be considered
▪ Recommendations should include
alternatives
• If alternatives ae present
Step 6: Communicate Recommendations
▪ Memo to client File
• Includes:
• Restatement of pertinent facts
• Any assumptions researcher made
• The issues addressed
• The applicable authority
• The practitioner’s recommendations
The File Memo
Purpose:
1.
Organize facts, issues, and conclusions
2.
Facilitate a review of the research activities by
the practitioner’s supervisors or colleagues
3.
Allow for subsequent examination of research
issue with respect to the same or similar fact
situation
•
Supporting documentation if audited by IRS
The File Memo: Format and Content
(Slide 1 of 2)
▪ Facts
• Brief summary of relevant facts and issues
▪ Issues
• A list of tax issues being researched. If multiple issues each
should be numbered 1, 2, 3, etc.
▪ Conclusion(s)
• Quickly determine whether each issue is “pro” or “con” for
taxpayer. If multiple issues, conclusions should be
numbered 1, 2, 3, etc.
▪ List of Authorities
• List of primary authorities and citations relied upon in the
Support and Analysis section of the memo
The File Memo: Format and Content
(Slide 1 of 2)
▪ Support and Analysis
• Detailed review and evaluation of controlling laws
• APPLY LAW TO FACTS TO SUPPORT CONCLUSIONS.
• Full citations to primary authorities
• Do not cite to secondary authorities
• Strengths and weaknesses of both sides of tax argument
▪ Actions to Be Taken
• Recommend subsequent actions for client
• Identify other strategies for tax return or audit positions
Computerized Tax Research
Online Tax Resources
• RIA Checkpoint
Available at UNLV
• This is the database you will use
•
• CCH AnswerConnect
• Tax Analysts
• LexisNexis Tax Center
•
Nexis Uni (academic version) is available at
UNLV Library website
• Westlaw
• Bloomberg BNA Tax &
Accounting
Tax Research with AI
▪ Risky!
▪ See article below:
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&
ved=2ahUKEwiox9Dr17EAxUCKEQIHfodBx8QFnoECBIQAQ&url=https%3A%2F%2Fwww.npr.org%
2F2023%2F12%2F30%2F1222273745%2Fmichael-cohen-ai-fake-legalcases&usg=AOvVaw1do13KzIs1j6fNZyK4NVdr&opi=89978449
RIA Checkpoint
▪ Four Search Methods
Key Word Search
2. Citation Search
3. Content Search
1.
• Table of Contents
4.
Index Search
Steps in the Online Research Process
– Key Word Search
Major Tax Services
RIA CheckPoint Search Connectors
The File Memo: Example (page 1 of 2)
The File Memo: Example (page 2 of 2)
Brown’s Research Problem Example
Client Facts
Our client, Mr. and Mrs. Brown live in South Dakota. They own
their home. They hold as investments the debt of several domestic
corporations. They report the interest on the investments as gross
income.
To diversify their portfolio, Mr. and Mrs. Brown took out a large
mortgage on their home and applied a portion of the proceeds to
purchase some City of Chandler School Bonds. The remainder of
the proceeds were used to expand the facilities of Mrs. Brown’s
dental clinic.
Mr. and Mrs. Brown want to know if they can deduct the
interest expense on the mortgage on their individual income
tax return?
Issue – Is interest expense paid on debt used to purchase tax-exempt bonds
deductible?
Keyword Search – “tax exempt interest” and “related interest expense deduction”