Need to write a short MEMO in Tax class.

The instructions are attached as well as a sample of the required format.

PLEASE FOLLOW THE FORMAT!

The facts for your Tax Research Assignment 2 are as follows:

Timothy Adams recently left a major law firm, Duey, Cheadham & Howe, LLP, to start his own independent law firm. He has a 401(k) account at the Duey, Cheadham that he wants to close and move the assets to a Traditional IRA. In addition, he still has a 401(k) at Target, where he worked while he was in law school, 5 years ago, and his financial advisor advised that he also close that one and move the assets to a new IRA. Finally, he has an existing Traditional IRA at Fidelity, and his financial advisor would like him to move that one to an IRA at the brokerage where the financial advisor works (they make better commissions that way!)

Timothy does not practice tax law; in fact he knows nothing about the tax laws associated with rolling over a retirement account. Luckily, he is smart enough to know what he doesn?t know and hires you as his accountant to advise him on these transactions. He needs to know the tax issues associated with moving assets from a 401(k) or IRA to a new IRA.

Specifically, he wants to know if he can take a distribution of the full amount of the assets in these retirement accounts, then redeposit them into new accounts, and if so, if there is a deadline in which he must do this. Or, alternatively, is it better for him to allow the 401(k) and IRA custodians to make the payments directly to the new IRA? What are the tax issues associated with either option?

Instructions:

Please research the tax law and write Timothy a brief memo of no more than two pages, in which you communicate the results of your research, including what method of moving assets he should use and why. Use the format for communicating research findings discussed in the Learning Resources for Week 1: ?Tax Research ? Federal,? and ?Locating Tax Authority,? as well as under ?Syllabus and Course Schedule: Tax Research Assignment How to Complete? in the Course Content area of LEO (THESE ARE ATTACHED BELOW).

Identify relevant statutory, administrative, and judicial authorities and discuss how these authorities affect your conclusion concerning the tax issues of Timothy?s proposed transactions.

*Remember: while IRS publications are useful as secondary sources, they are not primary sources that can be cited and relied upon in a tax research memorandum.

Your research assignment will be graded using the following criteria:

1. Recognition of the important facts and issues

2. Correct conclusion

3. Clarity of writing

4. Proper use of relevant sources to support your conclusion and analysis.

5. Proper citation of relevant sources

6. Proper format, spelling & grammar

Tax Research Memorandum To: Bruce Wilson From: Tax Accountant, CPA Date: May 25, 2015 Re: Tax Treatment of Lottery Winnings Facts You won $2,000,000 in the state lottery. The lottery pays out the prize money in 20 annual installments of $100,000 each. After receiving three $100,000 installments ($300,000), you sold the remaining $1,700,000 for $1,000,000. You want to report the $1,000,000 as long-term capital gain, on which the tax rate is 15%, rather than reporting it as ordinary income, on which you would be required to pay your 35% marginal tax rate. Issue The issue is (1) whether lottery winnings can be taxed at the long-term capital gains tax rate, and (2) whether selling the right to the cash flow from the winnings for a lump sum after owning the right to such cash flow for more than one year qualifies for long-term capital gains tax treatment. Rule Lottery rights are not a capital asset, and selling those rights, even after holding them for over one year, falls under the \"substitute for ordinary income doctrine, which provides that when a party receives a lump sum payment as essentially a substitute for what would otherwise be received at a future time as ordinary income, that lump sum payment is taxable as ordinary income as well.\" R.W. Womack v. Comm'r, 510 F. 3d 1295 (11th Cir. 2007). Analysis It is well established that Lottery rights are not a capital asset. Watkins v. Comm'r, 447 F. 3d 1269 (10th Cir. 2006); Lattera v. Comm'r, 437 F. 3d 399 (3d Cir. 2006), cert. denied, 127 S. Ct. 1328, 167 L.ed. 2d 86 (2007); United States v. Maginnis, 356 F. 3d 1179 (9th Cir. 2004); Davis v. Comm'r, 119 T.C. 1 (2002). Although 26 U.S.C. 1221 defines Capital Asset quite broadly, and does not specifically except lottery winnings from the definition, the 11th Circuit has found that \"the statutory definition of capital asset has never been read as broadly as the statutory language might seem to permit, because such a reading would encompass some things Congress did not intend to be taxed as capital gains.\" Maginnis, 356 F.3d at 1181; Womack, 510 F.3d 1295. All of these decisions are based on the so-called substitute for ordinary income doctrine, which provides that when a party receives a lump sum payment as \"essentially a substitute for what would otherwise be received at a future time as ordinary income, that lump sum payment is taxable as ordinary income as well.\" Comm'r v. P.G. Lake, Inc., 356 U.S. 260, 265, 78 S. Ct. 691, 694, 2 L. Ed. 2d 743 (1958). Womack, 510 F.3d 1295. The courts have focused on two significant factors in determining that lottery rights are not a capital asset and, therefore, the sale of such asset would not constitute a long term capital gain: 1. The taxpayer did not make any underlying investment of capital in return for the receipt of the lottery right, and 2. The sale of the right did not reflect an accretion in value over cost to any underlying asset held by the taxpayer. The first factor goes to the treatment of the initial distribution of the winnings and, to quote the 11th Circuit, \"Lottery Rights are a clear case of a substitute for ordinary income. A lottery winner who has not sold the right to his winnings to a third party must report the winnings as ordinary income whether the state pays him in a lump sum or in installments. 26 U.S.C. 165(d). As to the second factor, the court focused on the difference between lottery rights and \"the typical capital asset,...shares of stock. [In the case of stock], the taxpayer makes an underlying investment in the stock, owns the shares for longer than a year, and then sells them at a higher price. The gain represents an increase in the value of the original investment. Lottery rights involve no underlying investment of capital...[and] gain from their sale reflects no change in the value of the asset. It is simply the amount [the] taxpayers would have received eventually, discounted to present value. Furthermore, when a lottery winner sells lottery rights, he transfers a right to income that is already earned, not a right to earn income in the future. A capital asset has the potential to earn income in the future based on the owner's actions in using it. Lottery winners, by contrast, are entitled to the income merely by virtue of owning the property.\" Womack, 510 F.3d 1295. Conclusion Based on the analysis above, it is clear that, notwithstanding the sale of the remaining payments for a lump sum after owning them for more than one year, you will have to pay income taxes on the $1,000,000 at your 35% marginal rate. Any other action will ultimately result in your owing interest and penalties to the IRS. The facts for your Tax Research Assignment 2 are as follows: Timothy Adams recently left a major law firm, Duey, Cheadham & Howe, LLP, to start his own independent law firm. He has a 401(k) account at the Duey, Cheadham that he wants to close and move the assets to a Traditional IRA. In addition, he still has a 401(k) at Target, where he worked while he was in law school, 5 years ago, and his financial advisor advised that he also close that one and move the assets to a new IRA. Finally, he has an existing Traditional IRA at Fidelity, and his financial advisor would like him to move that one to an IRA at the brokerage where the financial advisor works (they make better commissions that way!) Timothy does not practice tax law; in fact he knows nothing about the tax laws associated with rolling over a retirement account. Luckily, he is smart enough to know what he doesn't know and hires you as his accountant to advise him on these transactions. He needs to know the tax issues associated with moving assets from a 401(k) or IRA to a new IRA. Specifically, he wants to know if he can take a distribution of the full amount of the assets in these retirement accounts, then redeposit them into new accounts, and if so, if there is a deadline in which he must do this. Or, alternatively, is it better for him to allow the 401(k) and IRA custodians to make the payments directly to the new IRA? What are the tax issues associated with either option? Instructions: Please research the tax law and write Timothy a brief memo of no more than two pages, in which you communicate the results of your research, including what method of moving assets he should use and why. Use the format for communicating research findings discussed in the Learning Resources for Week 1: \"Tax Research - Federal,\" and \"Locating Tax Authority,\" as well as under \"Syllabus and Course Schedule: Tax Research Assignment How to Complete\" in the Course Content area of LEO. Identify relevant statutory, administrative, and judicial authorities and discuss how these authorities affect your conclusion concerning the tax issues of Timothy's proposed transactions. *Remember: while IRS publications are useful as secondary sources, they are not primary sources that can be cited and relied upon in a tax research memorandum. Your research assignment will be graded using the following criteria: 1. Recognition of the important facts and issues 2. Correct conclusion 3. Clarity of writing 4. Proper use of relevant sources to support your conclusion and analysis. 5. Proper citation of relevant sources 6. Proper format, spelling & grammar Tax Research Assignment The five steps in tax research are: understand the facts identify issues locate relevant authorities analyze the tax authorities communicate research results. The two types of tax services that tax professionals use in tax research are annotated tax services, arranged by code section, and topical services, arranged by topic. Research questions often consist of questions of fact or questions of law. The answer to a question of fact hinges upon the facts and circumstances of the taxpayer's transaction. The answer to a question of law hinges upon the interpretation of the law, such as interpreting a particular phrase in a code section. When the researcher identifies that different authorities have conflicting views, she should evaluate the \"hierarchy,\" jurisdiction, and age of the authorities. Once the tax researcher has identified relevant authorities, she must make sure that the authorities are still valid and up to date. The most common end product of a research question is a research memo, which has five basic parts: (1) facts, (2) issues, (3) authority list, (4) conclusion, and (5) analysis. Sample Research Memo Facts: Discuss facts relevant to the question presentedthat is, facts that provide necessary background of the transaction (generally, who, what, when, where, and how much) and those facts that may influence the research answer. Keeping the fact discussion relatively brief will focus the reader's attention on the relevant characteristics of the transaction. Issues: State the specific issues that the memo addresses. This section confirms that you understand the research question, reminds the reader of the question being analyzed, and allows future researchers to determine whether the analysis in the memo is relevant. Issues should be written as specifically as possible and be limited to one or two sentences per issue. Authorities: In this section, the researcher cites the relevant tax authorities that apply to the issue, such as the IRC, court cases, and revenue rulings. How many authorities should you cite? Enough to provide a clear understanding of the issue and interpretation of the law. Remember, in order to reach an accurate assessment of the strength of your conclusion, you should consider authorities that may support your desired conclusion, as well as those that may go against it. Conclusion: There should be one conclusion per issue. Each conclusion should answer the question as briefly as possible, and preferably indicate why the answer is what it is. Analysis: The goal of the analysis is for the researcher to provide the reader a clear understanding of the area of law and specific authorities that apply. Typically, an analysis will be organized to discuss the general area(s) of law first (the code section) and then the specific authorities (court cases, revenue rulings) that apply to the research question. How many authorities should you discuss? As many as necessary to provide the reader an understanding of the issue and relevant authorities. After you discuss the relevant authorities, apply the authorities to your client's transaction and explain how the authorities result in your conclusion. _______________________________________________________________________ _____ Client Letters In addition to internal research memos, tax professionals often send their clients letters that summarize their research and recommendations. Basic components of the client letter include: (1) research question and limitations, (2) facts, (3) analysis, and (4) closing. Here is a sample letter: For this course you will have three tax research assignments. This research assignment will include a memo and a client letter. Tax Research Assignment 2. The facts for this assignment are as follow: R.E.M., a calendar year corporation and Athens, Georgia, band recently sold tickets ($20,000,000) for concerts scheduled in the United States for next year and the following year. For financial statement purposes, R.E.M. will recognize the income from the tickets when it performs the concerts. For tax purposes, it uses the accrual method and would prefer to defer the income from the ticket sales until it performs the concerts. This is the first time that it has sold tickets one or two years in advance. Michael Stipe has asked your advice. Your research assignment will be graded using the following criteria: 1. Recognition of the important facts and issues 2. Correct conclusion 3. Proper citation of relevant sources 4. Format, Spelling & Grammar 5. Clarity of writing