Suppose your client, Client A, is an unmarried individual U.S. taxpayer living in New York City. She informs you that she recently entered into a settlement agreement with her investment advisor. The investment advisor has paid Client A $150,000. The payment is attributable to investment losses caused by the investment advisor?s alleged failure to follow the asset allocation directions from Client A. Specifically; Client A instructed her advisor to change the investment objective for her account from ?all equity? to ?current income.? The advisor understood these instructions to mean reallocate her portfolio from equity to income gradually over time, rather than an immediate sell off and restructuring. Client A claims that her intention was to do an immediate sell off and restructuring. Hence, a dispute arose with respect to the correct interpretation of her instructions and the decline in market value of the equity position over the length of time it took her advisor to gradually sell (restructure) her equity portfolio to income. Client A says this could have been avoided had the change in asset allocation been implemented immediately the way she wanted. In the interests of both parties in settling the dispute without admission of fault by either party, the investment advisor agreed to pay Client A $150,000.

Client A (the payee) wants to know the following:

Is this settlement payment taxable for federal income tax purposes?

And

If so, what is the character of the payment? Is it a reduction of tax basis of investment assets, ordinary income, or short or long-term capital gain income?

In addition, research and address what the income tax consequences are to the investment advisor (the payor) in making the settlement payment. Is the payment deductible, and if so, what is the character of the deduction?

Hint: Recall that income tax consequences in general are symmetrical; meaning that if one taxpayer for a given transaction has to report income, then the other taxpayer to the transaction generally has a deduction.

Prepare a tax research memorandum to answer the questions raised by your client. State any assumptions you make. Your written memorandum should be no approximately six pages in length. Recall that proper format and content are of equal importance. Refer to the Sample Tax Memorandum for guidance on the proper format. This assignment will be graded using the rubric below.

TAX 670: Project Guidelines and Grading Guide Overview The final project for this course is the creation of a Tax Research Memorandum. The final project consists of answering specific questions raised by your client, and will culminate in a professionally written memorandum that answers the questions and provides substantial support for the conclusions. The memorandum is due in Module Nine. Requirements Suppose your client, Client A, is an unmarried individual U.S. taxpayer living in New York City. She informs you that she recently entered into a settlement agreement with her investment advisor. The investment advisor has paid Client A $150,000. The payment is attributable to investment losses caused by the investment advisor's alleged failure to follow the asset allocation directions from Client A. Specifically; Client A instructed her advisor to change the investment objective for her account from \"all equity\" to \"current income.\" The advisor understood these instructions to mean reallocate her portfolio from equity to income gradually over time, rather than an immediate sell off and restructuring. Client A claims that her intention was to do an immediate sell off and restructuring. Hence, a dispute arose with respect to the correct interpretation of her instructions and the decline in market value of the equity position over the length of time it took her advisor to gradually sell (restructure) her equity portfolio to income. Client A says this could have been avoided had the change in asset allocation been implemented immediately the way she wanted. In the interests of both parties in settling the dispute without admission of fault by either party, the investment advisor agreed to pay Client A $150,000. Client A (the payee) wants to know the following: Is this settlement payment taxable for federal income tax purposes? And If so, what is the character of the payment? Is it a reduction of tax basis of investment assets, ordinary income, or short or long-term capital gain income? In addition, research and address what the income tax consequences are to the investment advisor (the payor) in making the settlement payment. Is the payment deductible, and if so, what is the character of the deduction? Hint: Recall that income tax consequences in general are symmetrical; meaning that if one taxpayer for a given transaction has to report income, then the other taxpayer to the transaction generally has a deduction. Prepare a tax research memorandum to answer the questions raised by your client. State any assumptions you make. Your written memorandum should be no approximately six pages in length. Recall that proper format and content are of equal importance. Refer to the Sample Tax Memorandum for guidance on the proper format. This assignment will be graded using the rubric below. Memorandum Rubric Requirements of submission: Written assignments must follow these formatting guidelines: double spacing, 12-point Times New Roman font, one-inch margins, and discipline-appropriate citations. Critical Elements Presentation of Facts and Issues Conclusion Law and Analysis Information Literacy Writing (Mechanics) Comments: Exemplary The memo includes all the facts and issue(s) related to the case and are in the correct format (27-30) Clearly and concisely presents the final decision of the researcher and answers all the questions stated in the issues section Proficient The memo includes all of the facts and issue(s) related to the case Needs Improvement The memo includes some of the facts and issue(s) related to the case (24-26) Presents the final decision of the researcher and answers most of the questions stated in the issues section (23-25) Explanation of decision and analysis is provided, and includes full citations for support (23-25) Identifies, locates, evaluates, and effectively and responsibly uses and shares information for problem at hand (9-10) No errors related to organization, grammar and style (9-10) (20-22) Explanation of decision and analysis is provided, and includes some citations (20-22) (21-23) Attempts to present the final decision of the researcher but does not answer the questions stated in the issues section (18-19) Identifies, locates, evaluates, and responsibly uses and shares information for problem at hand (8) Minor errors related to organization, grammar and style (8) Explanation of decision and analysis is provided, but is not fully supported (18-19) Identifies, locates, uses and shares information for problem at hand (7) Some errors related to organization, grammar and style (7) Not Evident The memo lacks presentation of the facts and issue(s) related to the case (0-20) Fails to present the final decision of the researcher or is completely incorrect (0-17) Explanation of decision and analysis is not provided (0-17) Does not Identify, locate, evaluate, and responsibly use and share information for problem at hand (0-6) Major errors related to organization, grammar and style (0-6) Earned Total Value 30 25 25 10 10 100% Sample Tax Memorandum Title: Requested By: Submitted By: Date Submitted: FACTS: This section should include all facts relevant to your analysis and conclusion. ISSUE(S): This section lists the tax questions that are presented in the facts. A tax researcher must analyze the facts carefully so that all of the questions or major issues are addressed. According to convention, each question should consist of one sentence. This makes questions very difficult to write. If the issue is complex, it may need to be broken down into several separate issues. CONCLUSION: Your memorandum should include a section that briefly summarizes the conclusions you have drawn from your analysis or discussion. LAW AND ANALYSIS: This section (some refer to as \"Discussion\") is the core of the memorandum. It restates each of the issues. Each question is followed by a discussion or analysis in which the writer shows how the tax law (statutes, cases, etc.) applies to the facts in the case. Each question should be answered