QUESTION 1: Research Memo - 65 points Your clients, Amy and Bob Smith, approach you about a tax planning idea called The Augusta Rule that they saw on TikTok. They have a personal residence in Ohio, a second residence in Michigan and a condo in Florida where Bob's father lives. They own and operate a successful IT consulting practice that is organized as an S corporation. They each own 50% of the S Corporation shares. They would like to use the personal residences to meet with and entertain clients and are proposing that the S Corporation rent each home for 14 days at a rental rate of $2,500 per day which amounts to rent expense of $35,000 annually for each residence and $105,000 in total. They based the daily rental amount on their desire to shelter approximately $100,000 of income. They have calculated that this will save them roughly $40,000 in tax as they are currently in the highest marginal federal and state brackets. Draft a tax research memo addressing the Smith's proposal and make recommendation(s), citing appropriate primary authority. Keep in mind that this is a tax planning memo; the transactions have not happened (yet), so you are free to explain the cautionary tale of their proposal as well as to offer suggestions as to what they should to insure a more favorable outcome. < Your memo should specifically address and cite the Internal Revenue Code. Apply the law from these sections to the situation: IRC 162(a) < IRC 280A(g) < You should also cite at least one relevant court case. There are certainly many to choose from, but here are two recent cases you can refer to: < TC Memo 2023-140 Jadhav v. Commissioner TC Memo 2023-105 Sinopoli v. Commissioner QUESTION 2: Taxpayer Penalties and Disclosure - 10 points Continuing with the facts from question 1. Your clients, the Smiths, want to claim a tax deduction on their S Corporation return for the rents paid to them for the rentals of their personal residences. Assume they want to maximize legitimate deductions without the chance of incurring the civil penalty for underpayment of taxes. Complete the following table to compare results given varying probability of success in court: < Probability of Success (of the Can Deduction be Is form 8275 Claimed? Explanation required? rent deduction being allowed) 80% 40% 20% < 2% 2 2 2 2 2 2 2 E QUESTION 3: Preparer Standards - 25 points < Further assume that the Smiths claimed this deduction on their S Corp return last year (when another preparer signed the return). They come to you this year, having made $105,000 of rental payments which they want to deduct. However, you have concluded that the full deduction is not permitted; yet they still insist on claiming the full deduction this year. Discuss the dilemma and your obligations for both the current year AND the prior year, citing relevant tax preparer guidance (Circular 230, AICPA Code of Conduct and SSTSS). QUESTION 4: Extra Credit - Form of Business Recommendations - 5 points Knowing that you are about to become a CPA, your old college roommate comes to you for some tax advice. He plans to develop a new app and sees the opportunity for great success with the ultimate goal of selling it to a large public company within 5 years. He has another full-time job where he earns wages of approximately $100,000 which he plans to keep because he does not plan on taking money out of his new venture. Rather his plan is to develop the app and make a windfall on the sale. He projects this new venture will produce a few years of losses followed by perhaps modest income and then ultimately substantial profit (upwards of $1M) when sold. He is wondering the best way to structure and operate this new business. What would you recommend and why?