AC312 Tax Research Memo #2

You provide tax consulting services for Oh Gnome You Didnt, Inc. (Gnome), a C-corporation that designs and constructs whimsical gnome gardens for its clientele. On May 25^th, 2018, Gnome acquired substantially all the business assets of an unrelated company named You Better Duck, Inc. (Duck).

Duck bathed and groomed pet ducks prior to Gnomes acquisition of its assets. It is well-known that 75% of duck aficionados own a gnome garden because ducks love to quack up at the funny-looking gnomes, so this was a very strategic business decision for Gnome. The transition was seamless, and no duck was forced to stay unkempt for a moment.

Gnome paid $1,725,000 to acquire Ducks assets, of which $690,000 was allocated to tangible assets and the remaining $1,035,000 of the purchase price related to Ducks intangible assets. Your friend Millie who also happens to be Gnomes CFO has provided the following table for you to reference that itemizes the purchase and computes the 2018 GAAP expense associated with the acquired assets:

Asset Description	Adjusted Basis	Cost Allocation Method GAAP	2018 GAAP Expense
Duck bathing and grooming equipment	$690,000	Depreciate over 48 months, beginning with June 2018	$690,000/48 months * 7 months in 2018 = 100,625
3-year exclusive supplier agreement with Ducks R Us	93,000	Amortize over 36 months, beginning with June 2018	$93,000/36 months * 7 months in 2018 = 18,083
Patent for the Clean Bill of Health bathing process invented by Donald, Ducks founder (expires in 16 years)	25,000	Amortize over 192 months, beginning with June 2018	$25,000/192 months * 7 months in 2018 = 911
2-year Employment Agreement with the #1 duck whisperer in the known universe	260,000	Amortize over 24 months, beginning with June 2018	$260,000/24 months * 7 months in 2018 = 75,833
Goodwill	657,000	Not amortizable	Not Applicable
Total Cost of Acquired Assets	$1,725,000	2018 GAAP Depreciation & Amortization Expense for Acquired Assets	$195,452

AC312 Tax Research Memo #2 (continued)

Millie would like to know the 2018 tax expense amount that will be reported on Gnomes income tax return with respect to the acquired assets. She has asked you to compute the allowable 2018 tax depreciation and tax amortization expense amounts and would like you to summarize your results using the partially completed table below.

Millie believes that Gnomes 2018 income tax return is likely to be audited by the IRS, so she has requested you document your findings in a professional tax research memo using proper citations to substantiate your cost allocation method conclusions for each type of asset.

Asset Description	Adjusted Basis	Cost Allocation Method Tax	2018 Tax Expense
Duck bathing and grooming equipment	$690,000
3-year exclusive supplier agreement with Ducks R Us	93,000
Patent for the Clean Bill of Health bathing process invented by Donald, Ducks founder (expires in 16 years)	25,000
2-year Employment Agreement with the #1 duck whisperer in the known universe	260,000
Goodwill	657,000
Total Cost of Acquired Assets	$1,725,000	2018 Tax Depreciation & Amortization Expense for Acquired Assets	$???

Tax Research Memo Tips

The key to becoming a well-respected leader in the tax field, or any business/accounting/finance field, is to be able to accurately and efficiently communicate technical concepts, issues, and proposed resolutions using laymans terms.

Facts

The Facts section should ONLY include facts required for the reader to make an informed decision about the accuracy of your research conclusions. You should not include any facts that are inconsequential.

When the facts include numerical details such as multiple dates or amounts, you should consider using a bulleted format or table layout to enhance comprehension of the details.

Issue

The Issues section is where you will list the questions your client has asked you to address. When there is more than one issue to resolve, using a numbering format is an effective way to organize the memo.

Avoid creating issues that arent relevant to the matter at hand; but on the other hand, you should be all-inclusive with your issue identification.

Conclusion

The Conclusion section is where you will provide the solutions to the clients issues. If you used a numbered format in the Issues section, you should follow the same format. Do not provide conclusions for any issues not identified in the Issues section. You should INCLUDE the solution but EXCLUDE the reason for the solution.

Example: if the solution to an issue is 4 and the computation was 8 + 12 7 + 32 41= 4, you would state The answer is 4 in the Conclusion section. The computation belongs in the Analysis section.

Analysis

The Analysis section is where you will defend your conclusion(s). You should analyze each issue separately; if you used a numbered format in the Issues section, you should follow the same format.

Your analysis of each issue should begin with relevant Internal Revenue Code statutory/regulatory cites.

If you require further support for your conclusion, you may then refer to weaker defenses (i.e. revenue rulings/procedures, court cases, IRS web site references, etc.)

It is extremely important to SUMMARIZE the authoritative guidance information for the client using PLAIN LANGUAGE and EXPLAIN how the guidance applies to the clients issue in YOUR OWN WORDS.

Other Advice for Professional Tax Memos

Throughout the memo, be as succinct as possible. The tax rules and regulations are difficult enough to analyze as it is; there is no need to include fluffy language; there is no need to include inapplicable authoritative guidance; there is no need to create issues that the client isnt interested in resolving now.