Mike Saxon is negotiating the purchase of a business. The final purchase price has been agreed upon, but the allocation of the purchase price to the assets is still being discussed. Appraisals on a warehouse range from $1.2 million to $1.5 million. If a value of $1.2 million is used for a warehouse, the remainder of the purchase price, $800,000 , will be allocated to goodwill. If $1.5 million is allocated to the warehouse, goodwill be $500,000. Mike wants to know what affect each alternative will have on cost recovery and amortization during the first year. Under the agreement, Mike will take over the business on January 1 of next year. Write a letter to Mike in which you present your calculations and recommendation. Also, prepare a memo for the tax files. Mikes address is 200 Rolling Hills Drive, Shavertown, PA 18708

Date April 9, 2017 Writing Assignment Fact Mike Saxon is negotiating the purchase of a business. The final purchase price has been agreed upon, but the allocation of the purchase price to the assets is still being discussed. Appraisals on a warehouse range from $1.2 million to $1.5 million. If a value of $1.2 million is used for a warehouse, the remainder of the purchase price, $800,000, will be allocated to goodwill. If $1.5 million is allocated to the warehouse, goodwill be $500,000. Mike wants to know what affect each alternative will have on cost recovery and amortization during the first year. Under the agreement, Mike will take over the business on January 1 of next year. Write a letter to Mike in which you present your calculations and recommendation. Also, prepare a memo for the tax files. Mikes address is 200 Rolling Hills Drive, Shavertown, PA 18708 Applicable law Rationale Conclusion Date: Feb 2, 2015 TO: Tax Files FROM: Linh Cao RE: Jorge Quintanilla, TC Memo 2016-5 Facts Quintanilla, a California resident, filed his own tax return for the year 2009 and 2010, which resulted in a deficiency of $11,000 and $15,000 respectively. He also tacked on an accuracy-related penalty for both years. He owns a company named Pre Call Studios Inc., which filed Form 1120, U.S. Corporation Income Tax Return in 2009 and filed Form 1120S, U.S. Income Corporation Tax Return for S corporation in 2010 after Pre Call Studios made an S-corporation election. Receipts and expenses are collected by Quintanilla but are documented by his accountant. Production companies hired Quintanilla to build sets. He also does various jobs includes being a driver, hyphenate driver, and set dresser. Quintanilla stated that the contractor companies or corporations have little interest in separating Pre Call and Quintanilla in hiring as all the calls went to the same cell phone number. Jorge Quintanilla grossed more than $84,000 in 2009 and almost $90,000 in 2010 as an exceptionally skilled production worker on approximately 150 commercials shot in Southern California. He earned this money both in his own name and through his corporation, and he says that he earned it as an independent contractor, not as an employee. The Commissioner disagrees. Applicable law Applying Mich. v. Commissioner, the Court concluded that the commissioner's failure to challenge Quintanilla's status for the 2008 tax year does not disable him from challenging that status for 2009 and 2010. Quintanilla incurred substantial expenses which makes the question of independent contractor vs. employee importantif he is an employee those expense are deductible only as itemized deductions, subject to the 2% of adjusted gross income limitation and not deductible for alternative minimum tax purposes. However, if he is an independent contractor those expenses would be fully deductible in computing adjusted gross income and also allowed in computing adjusted gross income. Secs. 62(a) (2), 63(a), (d), 67(a) and (b), 162(a). A secondary issue is whether Quintanilla owes a penalty. Section 6662 imposes an \"accuracy-related penalty\" of 20% of the portion of the underpayment of tax that is attributable to the taxpayer's negligence or to his disregard of rules or regulations. In addition, Sec. 6662(a) and (b)(1) states that a taxpayer can escape the penalty if he shows that he had reasonable cause for the underpayment and acted in good faith. Sec. 6664(c)(1) applies to which a taxpayer acted with reasonable cause and in good faith is a factsand-circumstances decision, and the most important fact is the extent of the taxpayer's effort to assess his proper tax liability in light of his knowledge and experience. Rationale Using the general tests for employee vs. independent contractor the court noted that, despite getting a W-2 from a payroll company, the relationships fell into the independent contractor category. Specifically, Quintanilla had a large degree of control over what he did, provided all of the tools used, had an opportunity to earn a profit or loss, and the fact that, while perhaps continuing to be paid by the same payroll company, he would work for a large number of different production companies on very short term projects. As for Quintanilla's final argument, it is possible to be a statutory employee if one is a common-law independent contractor. But he doesn't fit any of the categories of statutory employees listed in sec. 3121(d)(3), and it doesn't matter because independent contractors and statutory employees can both deduct business expenses on Schedule C instead of Schedule A. Because Quintanilla received a Form 1099-G, Certain Government Payments, for each year at issue, he is liable for the deficiency and associated penalties attributable to his failure to include these refunds on his returns. Conclusion After reviewing the factors, the Court rule that Quintanilla should be treated as an independent contractor on his individual tax return. It follows that he appropriately deducted items on his Schedule C. With the Court's ruling in his favor on the merits, the penalty also disappears. However, he had to pay tax for the state income-tax refunds he received in 2009 and 2010