Tax Research Exercise

Five assorted tax research problems follow below (each problem is worth up to seven (7) points thirty (35) points possible for the entire exercise). You should present (on regular copy/printer paper and an electronic file see instructions) your answers to these problems using the following format:

Issue: Restate the primary issue(s) in the problem (you can copy and paste from the facts provided below) and if appropriate, list any additional issue(s) you determined were relevant from your research.

Conclusion: Answer the basic issue or issues in concise yet meaningful terms. These should be plain-language statements not technical jargon.

Arguments and Authorities: Explain the basis for your conclusions above. Include appropriate technical citations with related analysis (e.g. IRC 172 provides that a business may carry forward a Net Operating Loss generated before 2018 for twenty years or In Gregory v. Helvering, 293 U.S. 465, the United States Supreme Court held that there must be a valid business purpose.). In general, one or two explanatory paragraphs should be sufficient, but you can be a bit longer if you deem it necessary.

Note: Unless otherwise indicated in the case facts, all research should focus on the tax law and related rules and regulations in effect as of December 31, 2018 (current law). In other words, since the default in most cases in CCH Cheetah and RIA Checkpoint is to current law and rules, drilling-down for older materials is not generally appropriate or needed.

1) Magnus, a high school teacher, enjoys hang gliding in his spare time. Magnus lives near Briarwood Cliffs, a notable geographic feature in his state located in the City of Avalon. Briarwood Cliffs has become such a popular destination for hang gliding enthusiasts that the City of Avalon recently created a special improvements district (the District) to manage the area. The District has plans to undertake construction of several improvements to the area, including glider launching facilities and related supporting elements (e.g. parking areas, etc.). All such facilities will be available to the general public. The District plans to issue bonds (authorized under state law) to fund a portion of the planned improvements (the interest and principle payments on the bonds will be funded through a special District property tax assessment along with public admission and user fees). Magnus is intrigued by this bond offering and is considering investing. However, he requires clarification of the tax status of the interest he would earn on this investment.

Primary Issue: Will the interest Magnus earns on any investment in District bonds be exempt from federal income taxation? Hint: Start with IRC 103 and the regulations thereunder.