Tax Memo – A

Please use case law, statutes, acts, etc. to make your point. Use RIA Checkpoint to find the relevant law. From the assignment: Prepare a tax memorandum for use in advising the client. State the issue(s) to be resolved and make sure to identify the specific authorities (code, statutes, case law etc.) that address your client’s tax issues. Make sure to weigh authorities both for and against your client’s position. Be sure to provide an analysis of why the code applies.

Research Memo A:
Hint: Fact patterns are based on a recently decided tax case
Fact Pattern #1
The legislature in the State of Red enacted a new law requiring out-of-state sellers to collect and
remit sales tax on the retail sales of goods and services in the State. Sellers are required to collect
and remit the tax to the State, but if they do not then in-state consumers are responsible for
paying a use tax at the same rate. The Act covers only sellers that, on an annual basis, deliver
more than $150,000 of goods or services into the State or engage in 200 or more separate
transactions for the delivery of goods or services into the State. Your client is a B-etsy online
retailer with no employees or offices in the State of Red and, therefore, has not collected any
sales tax under the new Act. Your client has received a notice from the State of Red requiring
your client to register for a license to collect and remit the sales tax. A refusal to do so will result
in your client being prohibited from online sales of any goods or services in the State. Your
client wants to know if the business must comply with the sales tax requirements of the State of
Red. Also, what implications might this have in other states where your client does business
online?
Prepare a tax memorandum for use in advising your client. State the issue(s) to be resolved and
make sure to identify the specific authorities (code, statutes, case law etc.) that address your
client’s tax issues. Make sure to weigh authorities both for and against your client’s position.
The memo should be 2 pages, double spaced, one-inch margins, 12pt.
Hint: search engine words “online seller” “sales tax” “court decision”
Hint: Fact patterns are based on a recently decided tax case
Fact Pattern #2
Your client, Smartbucks, a U.S. corporation conducts a major part of its coffee business through
its wholly owned international subsidiary, Trader Jobs, located on the Turks and Caicos Island.
As Smartbuck’s accountants, your firm does the tax planning for these two related companies to
minimize or avoid the payment of taxes by Smartbucks in the US which is a higher tax
jurisdiction than Turks and Caicos jurisdiction.
In the past Smartbucks sold industrial coffee equipment to Trader Jobs. Trader Jobs then sold the
same equipment for profit. The profits from those sales were reported and taxed in the Turks and
Caicos, which resulted in significant tax savings for Smartbucks. Your firm explained to your
client that this transaction, known as “transfer pricing,” allows Smartbucks to shift profits
that would otherwise be subject to U.S. tax offshore to avoid tax. Your firm wants to use the
same method to identify and shift costs between Smartbucks and Trader Jobs.
Specifically, Smartbucks has formulated a new latte coffee recipe with Trader Jobs and both
companies would benefit taxwise if the research and development costs could be shared between
them. To document the transaction, Smartbucks and Trader Jobs entered into a research and
development (“R&D”) cost-sharing agreement which allows Trader Jobs the authority to license
the new recipe internationally. You previously advised your client that the interplay of cost and
income allocation between the two companies in this transaction will result in significantly
reduced taxes for Smartbucks.
You also advised your client that there is some risk in engaging in multinational corporate tax
avoidance because the tax laws grant the IRS authority to allocate income and costs between
related parties if it determines that any particular transaction fails to satisfy the arm’s length
standard. As part of the R&D cost sharing agreement, your firm did not share the cost of certain
employee stock options resulting in a substantial tax savings to Smartbucks in association with
over $100 million in income. The IRS has reviewed the transaction and contends that the
allocation of stock compensation costs between the companies must be appropriate to reflect
economic reality and that the allocation of the employee stock compensation costs under the cost
sharing arrangement fails the arm’s length standard. On behalf of Smartbucks, your firm
contends that the IRS has exceeded its authority under the arm’s length standard because the cost
sharing methodology used in the R&D cost sharing agreement established “parity with
uncontrolled taxpayers” and the actual results or economic reality is irrelevant under the arm’s
length standard. Methodology controls over result.
Prepare a tax memorandum for use in advising your firm’s managing partner assigned to
Smartbucks. State the issue(s) to be resolved and make sure to identify the specific authorities
(code, statutes, case law etc.) that address your client’s tax issues. Make sure to weigh
authorities both for and against your client’s position.
The memo should be 2 pages, double spaced, one-inch margins, 12pt.
Hint: search engine words: “related entities” “cost sharing” “court decision”