Prepare a detailed Tax File Memorandum (see page 2-27 Exhibit 2.9 for an example) analyzing a specific tax scenario. It is critical that you first identify the tax issues and reference Federal Tax Law primary sources. Be sure to use keyword searches in the CCH or RIA tax services to identify the applicable tax laws. Be sure to cite the primary source (i.e., Code, Regulations, Revenue Rulings, etc.). A tax service and its interpretations or explanations cannot be cited as authority when representing your client before the IRS of in court.

Scenario: Your client, Daves Sport Shop (a cash basis taxpayer), sells sports equipment and clothing in three retail outlets in New York City. During 2019, the CFO decided that keeping track of inventory using a combination of QuickBooks and spreadsheets was not an efficient way to manage the stores inventories. So Daves purchased an inventory management system for $90,000 that allowed the entity to keep track of inventory, as well as automate ordering and purchasing, without replacing QuickBooks for its accounting function. The CFO would like to know whether the cost of the inventory management program can be expensed in the year of purchase. Write a Tax File Memorandum (see page 2-27 Exhibit 2.9 for an example) addressing the tax treatment of the software. Questions: Q1) How is this type of transaction generally treated for tax purposes (i.e. expensed, capitalized, amortized)? What IRC section and subsection (i.e. 475(e)) addressing this issue? Q2) Under the general rule, how much of a deduction will Daves Sports Shop receive in the year the inventory management system is purchased and why? Q3) Is there any rationalization that can be used to immediately expense the cost of this software? If so, what IRC section and subsection?