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Tax Research Assignment 3.

The facts for this assignment are as follow:

Mary and Bob have been married for 25 years. They are both college professors. Mary (50 years of age) makes $65,000 annually and Bob (60 years of age) makes $75,000 annually. Their oldest daughter is getting married. Bob and Mary would like to either 1) take out a second mortgage on their home (they can get an interest rate of 7 percent) or 2) withdraw funds from their IRAs or 3) sell their rental property. The cost of the wedding is $35,000. The equity in their home is $150,000; they have $80,000 in IRAs between the two of them and the basis of the rental property is $20,000. The rental property can be sold for $120,000. Mary and Bob want to know how they should finance the wedding and if tax implications will be a factor.

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

\fSAMPLE TAX RESEARCH PROJECT Bruce Wilson won $2 million 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, Bruce sold the remaining $1.7 million of payments for $1 million. He wants to report the $1 million as long-term capital gain on his tax return, and pay tax at the 15-percent long-term capital gains tax rate rather than at his 35 percent marginal tax rate for ordinary income. Bruce requests you to research the law regarding the tax treatment of the $1 million and advise him on whether the payment qualifies for the 15-percent tax rate or would be taxed as ordinary income at his 35 percent marginal tax rate. Using the basic format for communicating research findings, submit a brief memorandum addressed to Bruce, in which you report your findings. Identify any relevant statutory, regulatory, and judicial authorities and discuss how these authorities affect your conclusion. Tax Brief Instructions 1. Write the title of the case and the case citation. The title of the case is structured as: petitioner's name (the person bringing the suit) v. respondent's name. For instance, "Jones v. Commissioner of Internal Revenue". The case citation is a series of numbers and descriptors used to retrieve the case, such as "2004 WL 29302 (U.S. Tax Ct.)". This citation states that the case occurred in 2004 and can be found using Westlaw at case 29302, and that it is a United States Tax Court case. 2. Summarize the facts of the case. The facts of any case, particularly a Tax Court case, can be very long and contain some nonessential information. Summarize the facts by writing down only the pertinent data: the names, dates and actions that ultimately determine how the case turns out. 3. State the issue or issues that are presented in the case. These issues are what make the case important enough for the Tax Court to hear it. Usually the issue statement can be formulated by beginning with the word "whether" and then stating the question to be determined in the case, such as "Whether a person realizes income when she sold her house for $250,000 and she has a cost basis in the house of $240,000." Another possible format is the "Under-Does-When" format, stated as: "Under the Tax Code, does a person realize income when she sold her house for $250,000 and she has a cost basis in the house of $240,000." 4. State the court's holding. The court's holding is the decision that the court made, such as: "The petitioner realized an income of $10,000 when she sold her house for $250,000 and she had a cost basis in the house of $240,000." 5. List the rules of law. There are rules of law that the Tax Court uses in arriving at its holding. List these rules in your case brief. The rules are often either statutes, such as "gross income means all income from whatever source derived," which is the Internal Revenue Code section 61; or the holding from previous case law, which will be accompanied by a case citation. 6. Summarize the court's rationale. It is important for law students to understand why the Tax Court arrived at the decision that it did, and to do this, they should write a brief summary of the court's rationale. Tips & Warnings Try to keep your case briefs as close to one page as possible. 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. This research assignment will include a memo and a client letter. The facts for the first assignment are as follow: In 2009, Mr. Smith purchased a principal residence for $1,500,000. He made a down payment of $300,000 and financed the remainder by borrowing $1,200,000 through a loan secured by the residence. In 2009, Mr. Smith paid interest that accrued on the indebtedness during that year. He had no other debt secured by the residence. May he deduct the entire amount of interest which was paid on the home loan? Your research assignment will be graded using the following criteria: 5. 1. Recognition of the important facts and issues 2. Correct conclusion 3. Proper citation of relevant sources 4. Format, Spelling & Grammar Clarity of writing 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. Tax writing website resources Communication, Tax Research, and Tax Practice Facts for Practice Researchhttp://www2.gsu.edu/~accerl/taxrelated/Facts.html Guidance and perspective on tax research memos http://www2.gsu.edu/~accerl/taxrelated/troubleshooting.html Authoritative Support Materials for Tax Research Memo: This web page contains the primary tax authorities cited in the tax research memo and, to a lesser extent, client letters. Cited passages are highlighted in yellow. http://www2.gsu.edu/~accerl/taxrelated/support.html Writing Tax Research Memoshttp://www2.gsu.edu/~accerl/taxrelated/RM.html Example of a Tax Research Memohttp://www2.gsu.edu/~accerl/taxrelated/RM-EX.html Writing Client Lettershttp://www2.gsu.edu/~accerl/taxrelated/RM.html The above links are from the Georgia State University School of Accountancy Tax Writing Web Site http://www2.gsu.edu/~accerl/ SAMPLE TAX RESEARCH PROJECT Bruce Wilson won $2 million 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, Bruce sold the remaining $1.7 million of payments for $1 million. He wants to report the $1 million as long-term capital gain on his tax return, and pay tax at the 15-percent long-term capital gains tax rate rather than at his 35 percent marginal tax rate for ordinary income. Bruce requests you to research the law regarding the tax treatment of the $1 million and advise him on whether the payment qualifies for the 15-percent tax rate or would be taxed as ordinary income at his 35 percent marginal tax rate. Using the basic format for communicating research findings, submit a brief memorandum addressed to Bruce, in which you report your findings. Identify any relevant statutory, regulatory, and judicial authorities and discuss how these authorities affect your conclusion. Tax Brief Instructions 1. Write the title of the case and the case citation. The title of the case is structured as: petitioner's name (the person bringing the suit) v. respondent's name. For instance, "Jones v. Commissioner of Internal Revenue". The case citation is a series of numbers and descriptors used to retrieve the case, such as "2004 WL 29302 (U.S. Tax Ct.)". This citation states that the case occurred in 2004 and can be found using Westlaw at case 29302, and that it is a United States Tax Court case. 2. Summarize the facts of the case. The facts of any case, particularly a Tax Court case, can be very long and contain some nonessential information. Summarize the facts by writing down only the pertinent data: the names, dates and actions that ultimately determine how the case turns out. 3. State the issue or issues that are presented in the case. These issues are what make the case important enough for the Tax Court to hear it. Usually the issue statement can be formulated by beginning with the word "whether" and then stating the question to be determined in the case, such as "Whether a person realizes income when she sold her house for $250,000 and she has a cost basis in the house of $240,000." Another possible format is the "Under-Does-When" format, stated as: "Under the Tax Code, does a person realize income when she sold her house for $250,000 and she has a cost basis in the house of $240,000." 4. State the court's holding. The court's holding is the decision that the court made, such as: "The petitioner realized an income of $10,000 when she sold her house for $250,000 and she had a cost basis in the house of $240,000." 5. List the rules of law. There are rules of law that the Tax Court uses in arriving at its holding. List these rules in your case brief. The rules are often either statutes, such as "gross income means all income from whatever source derived," which is the Internal Revenue Code section 61; or the holding from previous case law, which will be accompanied by a case citation. 6. Summarize the court's rationale. It is important for law students to understand why the Tax Court arrived at the decision that it did, and to do this, they should write a brief summary of the court's rationale. Tax Research Memorandum To: Mr. Bruce Wilson From: Tax Accountant, CPA Date: March 13, 2016 Re: state lottery. Facts Bruce Wilson won $2 million 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, Bruce sold the remaining $1.7 million of payments for $1 million Issue To research the law regarding the tax treatment of the $1 million and advise him on whether the payment qualifies for the 15-percent tax rate or would be taxed as ordinary income at his 35 percent marginal tax rate. Rule The reason for the Judges' decisions repeatedly referenced Section 1221, under the Internal Revenue Code; that defines capital assets, whether long- or short-term, by excluding eight different types of assets. In the case of Prebola v. Commissioner of Internal Revenue, although also relevant to the cases of Bruce Wilson and George Lattera, it was decided that \"the taxpayer could not argue that a purchase of a lottery ticket was a capital investment, and that the money received for the sale of the right could not be seen as reflecting an increase of value above the cost of any underlying asset\" (Shirley). Therefore, the lottery tickets and the associated winnings were among the eight exclusions under Section 1221, and declared ordinary income as a result of the rulings in both of the above-referenced cases, in addition to Section 1221 under the Internal Revenue Code, they further support the decision that the IRS made when auditing Bruce's tax return. It is, therefore, accurate to label his earnings from the sale of the remaining lottery winnings as ordinary income, not a capital gain 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. Analysis It is well established that Lottery rights are not a capital asset. Watkins v. Comm'r , 447 F. 3d 1269 (10 th 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 (9 th 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 11 th 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 capita 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. Communication, Tax Research, and Tax Practice Facts for Practice Researchhttp://www2.gsu.edu/~accerl/taxrelated/Facts.html Guidance and perspective on tax research memos http://www2.gsu.edu/~accerl/taxrelated/troubleshooting.html Authoritative Support Materials for Tax Research Memo: This web page contains the primary tax authorities cited in the tax research memo and, to a lesser extent, client letters. Cited passages are highlighted in yellow. http://www2.gsu.edu/~accerl/taxrelated/support.html Writing Tax Research Memoshttp://www2.gsu.edu/~accerl/taxrelated/RM.html Example of a Tax Research Memohttp://www2.gsu.edu/~accerl/taxrelated/RM-EX.html Writing Client Lettershttp://www2.gsu.edu/~accerl/taxrelated/RM.html The above links are from the Georgia State University School of Accountancy Tax Writing Web Site http://www2.gsu.edu/~accerl/