Client Communication, Ethics, and
Professionalism
Spring 2023
 

Tax Planning Scenarios- Case-1
 

NOTE:
You are to assume that the client is unavailable for additional pre-meeting questions,
clarifications etc.
If your team has questions during your research and believes that additional key facts would be
relevant to your conclusions, you may set forth any assumed facts in your memo and client letter
and then address your assumed facts with the client.
 

Alternatively, you may come to the client meeting and discuss open factual questions with your
client and then tailor your advice accordingly during the meeting.
Either approach is fine and is part of the creation of a real-life client experience.
 

Case Study/Client Scenario

I. Your Client: Mr. David Johnson
 

II. Your role: 

Your team members are employees of A to Z Tax Advisors LLP and you were
assigned this project by a Partner (Julie Butler) with your firm. The Partner, Julie, has reviewed
your team's research but is unable to join the meeting because she was delayed returning from an
international vacation due to airline cancellations.
 

The client is a long-time client of Julie's and a significant client of A to Z Tax Advisors. Mr.
Johnson has always greatly valued Julie's counsel and always wanted to work directly with her
relative to his tax planning.

Julie had asked your team, as distinguished graduates of CWRU Weatherhead School of
Management, to perform the research, send the client a letter and as a result of her unavailability,
meet with the client.
 

III. Background information relative to you and the client: 

 

Your team has never met the client in person and you have only spoken to him on the phone during the initial fact gathering phase of the project.
 

IV. Facts provided to you: Mr. Johnson is a successful investor, business owner and is
charitably minded.
 

He really enjoys creative business transactions which are tax efficient and which also allow him
to maximize his charitable giving. Mr. Johnson practiced law for many years but since 2015 he
has spent all of his time running his private business, investing and with charitable giving.
 

He hired your Firm based on your reputation of being smart, creative tax advisors. Mr. Johnson
is comfortable taking risks in business, and mentioned during the fact gathering stage that he
wants to be creative in tax planning and that he is is not concerned about the IRS. While he has
no intention of doing anything illegal, he is willing to proceed with ideas if there is at least some
chance that he could win. He also mentioned that the IRS hardly ever audits people because they
are short staffed and went on to say that as long as your firm is involved, he can avoid penalties
by pointing to the fact he hired tax professionals to guide him. Mr. Johnson is known generally
for being an ethical, professional business person and citizen, but when it comes to taxes, he is
more aggressive because he thinks taxes are unreasonably high and he wants to do whatever he
can to reduce his tax bill.
 

Mr. Johnson is considering two separate planning ideas with regard to which he has been
brainstorming with one of his close friends, Mr. Ferguson, who is also an attorney and seasoned
investor.
 

The first planning idea for 2023, for which he seeks your advice, is an arrangement where he
and Mr. Ferguson would each transfer shares of publicly traded stock they currently own to a
newly formed corporation to be called Team Investments, Inc. All of the stocks that each of them
would contribute are listed on NASDAQ or the New York Stock Exchange.
 

Each of them would be contributing two different stocks such that Team Investments, Inc would
then hold shares of four different companies. Johnson's shares have appreciated in value since
he purchased them years ago, while Mr. Ferguson's shares have lost value since he purchased
them years ago.
 

Johnson would be contributing stock with aggregate basis of $200,000 and current trading value
of $350,000. Ferguson would be contributing stock with aggregate basis of $ 400,000 and
current trading value of $ 350,000. Each of them would own 50% of Team Investments, Inc,
which would be set up as a C-Corporation. 

 

They hope not to incur any tax liability or make any tax inefficiencies upon formation of Team Investments, Inc, Inc and wonder about the tax consequences of selling shares within Team Investments, Inc.

They discussed the possibility that after contributing the stock to Team Investments, Inc that they
may decide to sell some of the stock and reinvest the proceeds in other stock traded on the public
exchanges. They hope to one day contribute some of the profits to various charitable
organizations.
 

The second situation for which he seeks your advice, relates to his desire to leverage some of
the value in his privately owned assets to fulfill some of his current charitable giving goals. He
owns some land personally and also owns a business, ITI, which helps wine makers find high
quality available land to purchase with the goal of growing vineyards. Ideal Terroir Inc., "ITI," is
incorporated as a C corporation and is profitable.
 

David Johnson has owned 100% of the common stock of "ITI", since the Corporation's
formation in 2012. While Mr. Johnson helps locate land owned by other individuals to then
broker a sale to various wine makers. ITI owns several parcels of land and David owns one
especially valuable parcel personally (outside of ITI).
 

The parcel owned individually by David is in Napa Valley has been in his family for two
generations. It has been used to grow grapes over the years and while its ideal for vineyards,
there have been inquiries by area developers who believe the land would be perfect for a new
luxury housing development. While Mr. Johnson has not had the land valued by a professional,
he believes the land could be sold to a winemaker for around $ 4,000,000. He also believes that
he could probably sell it to a real estate developer for around $ 7,000,000, with such premium
likely driven by the higher profit margins if the property is used as a luxury residential
development, as opposed to vineyards.
 

Mr. Johnson has asked you about determining fair market value (FMV) for tax purposes and
wonders about the approach to determining fair value that the IRS would use under two different
scenarios; 1) The charitable Income tax deduction if he donated the land he owns personally to
charity later this year; or 2) The value for inclusion in his estate for estate tax purposes if he
keeps the property and passes it along to his children at his death so that they could continue the
vineyards for another generation.
 

As to the possible charitable deduction, assuming he decides to donate it instead of using it for
wine making, David asked whether he could simply take a $7,000,000 deduction based on his
own knowledgeable estimate and not spend the money getting an appraisal since he doubts he
will get audited anyway.
 

He will appreciate any guidance you have as to valuations for tax purposes and any other
thoughts you may have.
 

Finally, David has asked whether there are any significant tax law changes for 2023 that will
impact his personal charitable giving deductions. He was not sure whether the administration in
Washington has changed any of the tax rules for charitable giving.
 

Your input will be critical in his decision making. Mr. Johnson 's address for purposes of the
letter is 111 Harvest Lane Cleveland, OH 44115.