Tax Accounting Memorandums I Need help writing a professional memorandum for my Corporate Tax Accounting Class. The Scenario is as follows: (1) Six years ago, Alysa, Allissa, and Allison organized What Will I Do When I Graduate (Graduation) to develop and sell computer software. (2) The three As each contributed $10,000 to Graduation in exchange for 1,000 shares of stock (for a total of 3,000 shares issued and outstanding, 1000 each). (3) Graduation borrowed $250,000 from Venture Capital Associates to finance operating costs and capital expenditures. (4) Because of intense competition, Graduation struggled in its early years of operation and sustained chronic losses. This year, Manie, who serves as Graduations president, decided it was necessary to seek additional funds to finance Graduations working capital. (5) Venture Capital Associates declined Manies request for additional capital because of the firms already high credit exposure to the software corporation. (6) CitiBank proposed to lend Graduation $100,000 but at a 14% premium over the prime rate. (This would be an exceptionally high rate.) (7)Investment Managers LLC proposed to invest $50,000 of equity capital into Graduation, but on condition that the investment firm be granted the right to elect five members to Graduations board of directors. (8) Discouraged by the high cost of external borrowing, Manie turned to the three shareholders. (9) He proposed to the three As that each of them, the three original investors, contribute an additional $25,000 to Graduation, each in exchange for 20-year debentures, The debentures would be unsecured and subordinated to Venture Capital Associates debt. Annual interest on the debentures would accrue at a 5% premium over the prime rate. The right to receive interest payments would be cumulative; that is, each debenture holder would be entitled to past and current interest payments before Graduations board could declare a common stock dividend, but the current interest could be deferred until the due date of the principal, twenty years. The debentures would be both nontransferable and noncallable. (10) The three As ask you, their tax accountant, to advise them on the tax implications of the proposed financing arrangement. After researching the issue, set forth your advice in a client letter. At a minimum, you should consult the following authorities: IRC Section 385 Rudolph A. Hardman, 60 AFTR 2d 87-5651, 82-7 USTC 9523 (9th Circuit, 1987) Tomlinson v The 1661 Corporation, 19 AFTR 2d 1413, 67-1 USTC 9438 (5th Circuit 1967) Professor's Advice to Student: This is the first memorandum for some of you. The following are points that may be of assistance to you: 1. It is important that all citations be in accordance with the guidance in Chapter 2 of the text book. It is essential that you master the ability to provide citations in perfect tax perfect form. (For the Internal Revenue Code, we use cite it as follows: Section 453 (a) (1) IRC. 2. These memorandums will be reviewed very carefully. Here is what I have learned about students with respect to their writing ability: a. If not pressed to write using excellent English and excellent style, Chapman students do not demonstrate great writing skills. b. If students expect to have their papers read carefully and expect to experience a careful review of their use of the English language, students have sensational writing skills. c. Our accounting graduates receive rave reviews from their employers with respect to their ability to write quality tax and auditing memorandums immediately upon beginning their professional careers. (Your professor deludes himself that these tax memorandums are a part of the rave reviews.) 3. The following are a few suggestions: a. Use fairly formal language b. Read the memorandum out loud before completing - this is the best possible way of knowing how a third party will read your memorandum c. Make sure that your conclusion ties precisely to a section of the Internal Revenue Code and that this code section is cited in the conclusion