Filthy Rich is the Manager of Students Heaven LLC, which owns, manages, and operates student residential rental properties (apartments) in Pullman, Washington. Almost all of the tenants are students attending Washington State University. The rental properties, under the name of Students Heaven LLC, consist of approximately 900 units, housed in 75 separate buildings. All of the buildings were built in the late 1960s through the late 1990s. The exterior construction was single-wall using T-111, a plywood siding which is part of the structural exterior wall of the building. An exterior paint (which could be a stain) is normally applied to the exterior side of the T-111 for both protection of the plywood and the general looks of the building. The T111 needs repainting every 5 to 7 years. The cost of painting the buildings is about $900,000. This would include the preparation of the siding, which consists of repairing any damaged T-111 (because rain-water seeped between the several plies of the plywood T-111), scraping the old paint, recaulking, and applying the paint. Since Filthy Rich does not have a painting crew, all of the work painting the buildings is done by painting contractors. The normal cycle to paint the buildings was the year 2017. The buildings were beginning to look shabby and the old paint was no longer protecting the plywood T-111. However, Filthy Rich decided that he would apply vinyl siding to the building instead of painting the buildings. The vinyl siding should last 20 to 25 years (and in some instances could have a life of up to 40 years), rather than the normal painting life of 5 to 7 years. The cost of applying the siding is about the same as repainting the buildings because Filthy Rich could use his regular maintenance workers and get steep discounts for buying such a large quantity of siding at one time. The total cost incurred was about $1,273,000, and incurred in the year 2017. One of the reasons that the application of the vinyl siding is not more than painting results from the ability of Filthy Rich to purchase such large quantities, and he can get large discounts and very favorable pricing. The vinyl siding does not add any structural component to the building as it is merely a skin similar in nature to paint. Its sole purpose is to protect the plywood (T-111) and make the building attractive. It is the T-111 that is the structural component of the building. The buildings were originally constructed using aluminum thermopane windows. These windows need to be replaced about every 5 to 7 years because of the separation of the two panes of glass, window fogging caused by moisture getting between the two panes of glass, and normal damage to the windows by student tenants. Aluminum windows are no longer used in apartment construction as they no longer meet the Northwest Energy Code (a part of the building code). Currently, only vinyl windows are used in apartment building construction. Therefore, as the aluminum windows are replaced, they are replaced with vinyl windows. Filthy Rich replaced all of the remaining aluminum windows in the buildings with vinyl windows at the same time as the vinyl siding was installed. This was done because Filthy Rich had a maintenance crew available and replacing the aluminum windows after the vinyl siding was installed would result in substantial damage to the vinyl siding as much of the siding would RESEARCH PAPER - Acct. 483 2nd Research Paper Fall 2020 Page 2 of 5 have to be removed to replace the windows and then the siding reinstalled. The cost of replacing the remaining aluminum windows with vinyl windows was about $870,000.00. In addition to adding the vinyl siding and replacing the windows, Filthy Rich also replaced all of the wooden handrails on the balconies with steel handrails. The wood handrails were showing signs of weathering and Filthy Rich was concerned about safety, especially students falling off the balconies. Like the siding and windows, the steel handrails did not add to the structural aspect of the building. The cost of the steel handrails was $575,000. Filthy Rich had the building appraised by a professional real estate appraiser, Robert Willingham, who appraised the rental building at $67,500,000.00 (this is the fair market value of the apartment buildings). The appraiser is willing to testify that neither the addition of the vinyl siding, the replacement of the aluminum windows with vinyl windows, nor the replacement of the wood handrails with steel handrails would add any market value to the appraised market value of the buildings. He is also willing to testify that the construction costs of a painted wood exterior of T-111 plywood would be about the same as the construction costs using vinyl siding over plywood sheeting (which is what T-111 is, with a finished surface). The fair market value of the buildings would be decreased if the buildings are not maintained by painting or window replacement, and the decrease in value would be the cost of painting the buildings and replacing the windows. Of the three appraisal methods used by appraisers, the income approach is generally used in determining the fair market value of residential rental buildings. REQUIRED: You are required to write an opinion letter to Students Heaven LLC, setting forth your opinion as to how Students Heaven LLC should treat the installation (i.e. the cost of materials and application) of; (i) the vinyl siding; (ii) the replacement of the aluminum windows with vinyl windows; and (iii) the replacement of the wood handrails with steel handrails, for income tax purposes on the LLCs 2017 income tax return setting forth the income tax consequences, if any, of the hereinabove set forth facts. I will take on the role of Filthy Rich and you can ask me (as Filthy Rich) any questions you want to ask Filthy Rich, as you would if you were in a CPA practice. Also, ensure that you comply, with Circular 230 and I.R.C. 6662, and the regulations thereunder, Treas. Reg. 1.6662-4(d).