iSecurity

S Corporation Research Issue

One of your wealthy clients, Carolina, invests $100,000 for sole ownership of an electing S corporation's stock. The corporation, iSecurity, is in the process of developing a new electronic security product.

Carolina anticipates that the new business will need approximately $200,000 in capital (other than trade payables) during the first two years of its operations before it starts to earn sufficient profits to pay a return on the shareholder's investment. The first $100,000 of its total is to come form the contributed capital.

The remaining $100,000 of funds will come from one of the following three sources:

? Have the corporation borrow the $100,000 from a local bank. Carolina is required to serve as guarantor for the loan.

? Have the corporation borrow $100,000 from the estate of Carolina's late husband, Fernando. Carolina is the sole beneficiary of the estate.

? Have Carolina lend $100,000 to the corporation from her personal funds.

iSecurity will pay interest at a rate acceptable to the IRS. During the first two years of operations, iSecurity anticipates losing $125,000 before it begins to earn a profit. Your tax manager has asked you to evaluate the tax ramifications of each of the three financing alternatives.

Prepare a memorandum to the tax manager outlining the information you found in your research.

Tax Research, Practice, and Procedure Five-Step Research Method 1. Gather the facts and identify the tax issues. 2. Locate and study the primary and secondary authorities relevant to the enumerated tax issues. 3. Update and evaluate the weight of the various authorities. 4. Re-examine various facets of the research. 5. Arrive at conclusions; communicate these conclusions to the client. Chapter 2, Exhibit 3 2 Classification of Materials Primary or \"authoritative\" Internal Revenue Code (statutory authority) Treasury Regulations (administrative authority) Internal Revenue Service Rulings (administrative authority) Judicial Authority Secondary or \"reference\" Looseleaf tax reference services Periodicals Textbooks Treatises Published papers from tax institutes Symposia Newsletters Chapter 2, Exhibit 1 3 Research Sources for Legislative Authority Authoritative Documents Research Source Authorship Binding 16th Amendment Constitution Congress Internal Revenue Code CCH, RIA, and West tax services Congress Persuasive 4 Chapter 2, Exhibit 4a Research Sources for Legislative Authority Authoritative Documents Research Source Tax Treaties (to render mutual assistance between the U.S. and foreign countries in tax enforcement and to avoid double taxation.) Tax Treaties (CCH) Worldwide Tax Treaty Library (Tax Analysts) International Tax Treaties of All Nations (Oceana Publications) Authorship Congress Binding Persuasive (overrides Code if more recent) 5 Chapter 2, Exhibit 4b Research Sources for Legislative Authority Authoritative Documents Research Source Committee Reports (useful for determining Congressional intent when Code and Regs. are unclear) Bluebook (interprets new legislation) Chapter 2, Exhibit 4c Cumulative Bulletins [CB] Authorship Binding Persuasive House Ways and Means (U.S. Committee Government.). Senate Internal Revenue Finance Committee Bulletin [IRB] if Joint Conference written within 6 Committee months Bluebook (a government-issued, blue-covered book) Joint Committee on Taxation (no legal effect; only guidance) (no legal effect; only guidance) 6 Research Sources for Administrative Authority Authoritative Documents Research Sources Authorship Binding Persuasive Final Regulations (Treasury Decisions) Federal register (U.S. Government.) Tax services (CCH, RIA and West). U.S. Treasury Department Temporary Regulations (issued without opportunity for public comment because timing is critical) Federal Register (U.S. Government) Cumulative Bulletin (U.S. Government) Tax services (CCH, RIA, and West). U.S. Treasury Department (binding (nonbinding if if