Fact Pattern
South Florida CPAs, LLP is a boutique accounting firm in Tampa, FL. You are currently employed as a tax consultant at South Florida CPAs and have many intriguing clients with interesting (and sometimes strange) circumstances. Because the 2019 tax filing deadline is rapidly approaching, you receive several phone calls from clients inquiring about the tax consequences of recent transactions and events. The second and third pages of this document contain a summary of these phone calls.
Note: you are expected to complete this project using current, postTax Cuts and Jobs Act (H.R.1) law. In other words, apply the new law to the fact patterns below. To the extent your conclusion is contingent on an unknown fact, you should discuss possible outcomes for different assumptions.
Deliverables
There are two distinct deliverables for this project. Please ensure that you submit both for an opportunity to earn full credit on this assignment.
First, please prepare a separate internal research memo for each client inquiry you have been assigned (three in total). In general, the memos should document the analysis you performed and conclusions of your research. More specifically, the memos should reflect the following about each clients inquiry:
- Relevant facts
- Issues (questions) identified from the facts
- Applicable primary authority (importantly, IRS Publications may not be your only source for any particular client inquiry)
- Conclusions and recommendations reached as a consequence of your research
- Analysis performed (i.e., how the primary authority cited above addresses the issues)
You may use the template found in Exhibit 29 of your textbook to guide you in drafting your memo.
Second, once you have completed your memo, please attach copies and/or screenshots of all primary resources used in formulating your conclusions to your first deliverable.
Other Items
Work will be performed individually. As noted in the announcement on Canvas, you have randomly been assigned to perform research on three inquiries from the list below. You may view your assigned inquiries on page four of this document.
Deliverables will be evaluated on completion and adherence to the instructions above, but I do expect a bona fide attempt. Please make every effort to ensure that your submission reflects a professional document that you would be comfortable sending to a client who has paid substantial fees to have you perform this work.
Once complete, please upload your memos to Canvas.
Client Inquiries
- Bill has a friend who stole a significant sum of money from his employer this year. This individual has not been suspected by the employer, though a formal investigation been launched to identify the perpetrator of the fraudulent activity. Must the thief include the stolen funds in his or her gross income?
The answer to a question of law hinges upon the interpretation of the law, such as a particular phrase in a code section (see the sample research memo in Exhibit 2-9 for an example of a question of law). If a researcher is faced with this type of question, she will spend much of her time researching the various interpretations of the code section and take note of which authorities interpret the code differently and why Page 2-21 EXHIBIT 2-9 Sample Internal Res arch Momo Below is the memo Bill and Mercedes's CPA drafted after researching their issue Date: Preparer: Je Staff Reviewer: Sandra Miller Subject: Facts: July 8, 201S Deductibility of Points Paid in Refinancing Four years ago Bill and Mercedes's credit union provided them a $250,000 mortgage loan for their new home The mortgage loan was a four-year interest-only note with a balloon payment at the end of four years. Bill and Mercedes (Floridians residing in the 11th Circuit) chose this type of loan to allow them to minimize their mortgage payment until their other house was sold. After 18 months, Bill and Mercedes sold their other house and refinanced their original short-term loan with a 15-year conventional mortgage. The credit union charged Bill and Mercedes S3.000 in points (prepaid interest) upon the refinancing Can Bill and Mercedes deduct the points in the year they paid them? Issue: Authorities: IRC Sec. 461(g) Rev. Rul. 87-22, 1987-1 CB 146 J.R. Huntsman v. Comm. (8 Cir., 1990). 90-2 USTC par. 50,340, rev'g 91 TC 917 (1988) AOD 1991-002 PG. Cao . Comm. (9 Cir., 1996). 96-1 USTC par. 50. 167, aff'g 67 TCM 2171 (1994). Because Bill and Mercedes's refinancing represents an integrated step in securing permanent financing for their home, substantial authority supports their deduction of the $3,000 in points this year Conclusion: Analysis: IRC Sec. 461(g)(1) provides that cash-method taxpayers Bill and Mercedes) must amortize prepaid interest Analysis: IRC Sec. 461(g)(1) provides that cash-method taxpayers (Bill and Mercedes) must amortize prepaid interest (points) over the life of the loan instead of receiving a current deduction. IRC Sec. 461 (g) (2) provides an exception to the general rule of Sec. 461 (g)(1).Specifically, IRC Sec. 461(2)(2) allows cash-method taxpayers to deduct points in the year paid if the related debt was incurred "in connection with the purchase or improvement of," and secured by, the taxpayer's principal residence. The question whether Bill and Mercedes should amortize or currently deduct the points paid to refinance the mortgage on their principal residence depends upon the interpretation of "in connection with the purchase or improvement of found in IRC Sec 461(g)(2) There are two basic interpretations of "in connection with the purchase or improvement of." In Revenue Ruling 87-22, the IRS rules that points incurred in refinancing a mortgage on a taxpayer's residence are deductible in the year paid to the extent that the taxpayer uses the loan proceeds to improve the taxpayer's residence. Thus, points paid to simply refinance an existing mortgage without improving the residence must be amortized over the life of the loan In contrast, in J.R. Huntsman v. Comm., the Sth Circuit Court interpreted the phrase "in connection with the purchase or improvement of" much more broadly and held that points incurred to refinance a mortgage on the taxpayer's principal residence are currently deductible if the refinancing represents an integrated step to secure permanent financing for the taxpayer's residence. The facts in J.R. Huntsman v. Comm. are very similar to Bill and Mercedes's facts. Like Bill and Mercedes, the taxpayers in J.R. Hantsman V. Comm. also purchased their principal residence using a short-term loan with a "balloon" payment. When the balloon payment came due, the taxpayers obtained a permanent mortgage on their home (a 30-year conventional mortgage). The Sth Circuit Court held that in this case the permanent mortgage was acquired to extinguish the short-term financing and finalize the purchase of the home. "Thus, where taxpayers purchase a principal residence with a short-term three-year loan secured by a mortgage on the residence, and replace the loan with permanent financing.the permanent mortgage obtained is sufficiently in connection with the purchase of the home to fall within the exception provided for by section 461(g)(2) In Action on Decision 1991-002, the IRS has indicated that it will not follow the J.R. Huntsman V. Comm. decision outside the Sth Circuit (in the 11th Circuit where Bill and Mercedes live). Nonetheless, other courts The answer to a question of law hinges upon the interpretation of the law, such as a particular phrase in a code section (see the sample research memo in Exhibit 2-9 for an example of a question of law). If a researcher is faced with this type of question, she will spend much of her time researching the various interpretations of the code section and take note of which authorities interpret the code differently and why Page 2-21 EXHIBIT 2-9 Sample Internal Res arch Momo Below is the memo Bill and Mercedes's CPA drafted after researching their issue Date: Preparer: Je Staff Reviewer: Sandra Miller Subject: Facts: July 8, 201S Deductibility of Points Paid in Refinancing Four years ago Bill and Mercedes's credit union provided them a $250,000 mortgage loan for their new home The mortgage loan was a four-year interest-only note with a balloon payment at the end of four years. Bill and Mercedes (Floridians residing in the 11th Circuit) chose this type of loan to allow them to minimize their mortgage payment until their other house was sold. After 18 months, Bill and Mercedes sold their other house and refinanced their original short-term loan with a 15-year conventional mortgage. The credit union charged Bill and Mercedes S3.000 in points (prepaid interest) upon the refinancing Can Bill and Mercedes deduct the points in the year they paid them? Issue: Authorities: IRC Sec. 461(g) Rev. Rul. 87-22, 1987-1 CB 146 J.R. Huntsman v. Comm. (8 Cir., 1990). 90-2 USTC par. 50,340, rev'g 91 TC 917 (1988) AOD 1991-002 PG. Cao . Comm. (9 Cir., 1996). 96-1 USTC par. 50. 167, aff'g 67 TCM 2171 (1994). Because Bill and Mercedes's refinancing represents an integrated step in securing permanent financing for their home, substantial authority supports their deduction of the $3,000 in points this year Conclusion: Analysis: IRC Sec. 461(g)(1) provides that cash-method taxpayers Bill and Mercedes) must amortize prepaid interest Analysis: IRC Sec. 461(g)(1) provides that cash-method taxpayers (Bill and Mercedes) must amortize prepaid interest (points) over the life of the loan instead of receiving a current deduction. IRC Sec. 461 (g) (2) provides an exception to the general rule of Sec. 461 (g)(1).Specifically, IRC Sec. 461(2)(2) allows cash-method taxpayers to deduct points in the year paid if the related debt was incurred "in connection with the purchase or improvement of," and secured by, the taxpayer's principal residence. The question whether Bill and Mercedes should amortize or currently deduct the points paid to refinance the mortgage on their principal residence depends upon the interpretation of "in connection with the purchase or improvement of found in IRC Sec 461(g)(2) There are two basic interpretations of "in connection with the purchase or improvement of." In Revenue Ruling 87-22, the IRS rules that points incurred in refinancing a mortgage on a taxpayer's residence are deductible in the year paid to the extent that the taxpayer uses the loan proceeds to improve the taxpayer's residence. Thus, points paid to simply refinance an existing mortgage without improving the residence must be amortized over the life of the loan In contrast, in J.R. Huntsman v. Comm., the Sth Circuit Court interpreted the phrase "in connection with the purchase or improvement of" much more broadly and held that points incurred to refinance a mortgage on the taxpayer's principal residence are currently deductible if the refinancing represents an integrated step to secure permanent financing for the taxpayer's residence. The facts in J.R. Huntsman v. Comm. are very similar to Bill and Mercedes's facts. Like Bill and Mercedes, the taxpayers in J.R. Hantsman V. Comm. also purchased their principal residence using a short-term loan with a "balloon" payment. When the balloon payment came due, the taxpayers obtained a permanent mortgage on their home (a 30-year conventional mortgage). The Sth Circuit Court held that in this case the permanent mortgage was acquired to extinguish the short-term financing and finalize the purchase of the home. "Thus, where taxpayers purchase a principal residence with a short-term three-year loan secured by a mortgage on the residence, and replace the loan with permanent financing.the permanent mortgage obtained is sufficiently in connection with the purchase of the home to fall within the exception provided for by section 461(g)(2) In Action on Decision 1991-002, the IRS has indicated that it will not follow the J.R. Huntsman V. Comm. decision outside the Sth Circuit (in the 11th Circuit where Bill and Mercedes live). Nonetheless, other courts
