Question
Your firms client, Samuel Silverstone, invested $80,000 in the stock of a new start-up company that opened a chain of restaurants that specialized in exotic
Your firms client, Samuel Silverstone, invested $80,000 in the stock of a new start-up company that opened a chain of restaurants that specialized in exotic foods called Gnu-Shu. As might be expected, this venture has not been very successful and Samuels stock has lost its value. Samuel knows that worthless securities are normally treated as a short-term capital loss (STCL), which means the $3,000 annual maximum deduction and other limits apply. While talking to one of his co-investors, he discovers that her tax advisor (Eric McShamus) contents that if a taxpayer abandons a security it is not subject to the STCL treatment. Samuel is very excited about this and is anxious to asset that he abandoned the Gnu Shu stock so that he can deduct the entire $80,000 loss in the current year.
Your manager at the firm, Eleanor Jennings, has assigned you to research this matter and prepare a memo for her and a letter to the client. Please follow the instructions given at the top of page 1 and submit the required deliverables detailed below.
Deliverable: (in total this should be a 3-5 page submission)
1. Submit this assignment as a Word doc (required) with a cover sheet that briefly answers the questions listed above (from 1-2 words to 1-2 sentences each):
A. Regulation citation and date?
B. Do you need more information?
C. Conclusion?
2. Using the format shown on page 2-20 in your textbook, write an internal research memo to your reviewer, Eleanor Jennings.
3. Using the format shown on page 2-23, write a client letter to your firms client, conveying the results of your research.
Page 2-20 Sample Internal Research Memo Below is the memo that Bill and Mercedes's CPA drafted after researching their issue July 8, 2017 Date: Preparer:Joe Staff Reviewer: Subject: Sandra Miller Deductibility of Points Paid in Refinancing Four years ago Bill and Mercedes's credit union provided them a $250,000 mortgage loan for their new home. The mortgage loan was a four-year interest only note with a balloon payment at the end of four years. Bill and Mercedes (Floridians residing in the 11th Circuit) chose this type of loan to allow them to minimize their mortgage payment until their previous house was sold. After 18 months, Bill and Mercedes sold their previous house and refinanced their original short-term loan with a 15-year conventional mortgage. The credit union charged Bill and Mercedes $3,000 in points (prepaid interest) upon the refinancing. Can Bill and Mercedes deduct the points in the year they paid them? Facts: Issue: Authoritis IRC Sec. 461(g). Rev. Rul. 87-22, 1987-1 CB 146. J.R. Huntsman v. Comm. (8 Cir., 1990), 90-2 USTC par. 50.340. rev'g 91 TC 917 (1988) AOD 1991-002 P.G. Ca01, Comm. (9 Cir., 1996), 96-1 USTC par. 50, 167, aff'g 67 TCM 2171 (1994) Because Bill and Mercedes's refinancing represents an integrated step in securing permanent financing for their home, substantial authority supports their deduction of the S3,000 in points this year IRC Sec. 461(g(1) provides that cash-method taxpayers (Bill and Mercedes) must amortize prepaid interest (points) over the life of the loan instead of receiving a current deduction. IRC Sec. 461(g)(2) provides an exception to the general rule of Sec. 461 (g)1). Specifically, IRC Sec. 461 (g)(2) allows cash method taxpayers to deduct points in the year paid if the related debt was incurred "in connection with the purchase or improvement of," and secured by, the taxpayer's principal residence. The question whether Bill and Mercedes should amortize or currently deduct the points paid to refinance the mortgage on their principal residence depends upon the interpretation of "in connection with Conclusion: Analysis: the purchase or improvement of" found in IRC Sec. 461 (g 2). There are two basic interpretations of "in connection with the purchase or improvement of." In Revenue Ruling 87-22, the IRS rules that points incurred in refinancing a mortgage on a taxpayer's residence are deductible in the year paid to the extent that the taxpayer uses the loan proceeds to improve the taxpayer's residence. Thus, points paid to simply refinance an existing mortgage without improving the residence must be amortized over the life of the loan. In contrast, in J.R. Huntsman v. Comm., the 8th Circuit Court interpreted the phrase "in connection with the purchase or improvement of" much more broadly and held that points incurred to refinance a mortgage on the taxpayer's principal residence are currently deductible if the refinancing represents an integrated step to secure permanent financing for the taxpayer's residence. The facts in J.R. Huntsman v. Comm. are very similar to Bill and Mercedes's facts. Like Bill and Page 2-20 Sample Internal Research Memo Below is the memo that Bill and Mercedes's CPA drafted after researching their issue July 8, 2017 Date: Preparer:Joe Staff Reviewer: Subject: Sandra Miller Deductibility of Points Paid in Refinancing Four years ago Bill and Mercedes's credit union provided them a $250,000 mortgage loan for their new home. The mortgage loan was a four-year interest only note with a balloon payment at the end of four years. Bill and Mercedes (Floridians residing in the 11th Circuit) chose this type of loan to allow them to minimize their mortgage payment until their previous house was sold. After 18 months, Bill and Mercedes sold their previous house and refinanced their original short-term loan with a 15-year conventional mortgage. The credit union charged Bill and Mercedes $3,000 in points (prepaid interest) upon the refinancing. Can Bill and Mercedes deduct the points in the year they paid them? Facts: Issue: Authoritis IRC Sec. 461(g). Rev. Rul. 87-22, 1987-1 CB 146. J.R. Huntsman v. Comm. (8 Cir., 1990), 90-2 USTC par. 50.340. rev'g 91 TC 917 (1988) AOD 1991-002 P.G. Ca01, Comm. (9 Cir., 1996), 96-1 USTC par. 50, 167, aff'g 67 TCM 2171 (1994) Because Bill and Mercedes's refinancing represents an integrated step in securing permanent financing for their home, substantial authority supports their deduction of the S3,000 in points this year IRC Sec. 461(g(1) provides that cash-method taxpayers (Bill and Mercedes) must amortize prepaid interest (points) over the life of the loan instead of receiving a current deduction. IRC Sec. 461(g)(2) provides an exception to the general rule of Sec. 461 (g)1). Specifically, IRC Sec. 461 (g)(2) allows cash method taxpayers to deduct points in the year paid if the related debt was incurred "in connection with the purchase or improvement of," and secured by, the taxpayer's principal residence. The question whether Bill and Mercedes should amortize or currently deduct the points paid to refinance the mortgage on their principal residence depends upon the interpretation of "in connection with Conclusion: Analysis: the purchase or improvement of" found in IRC Sec. 461 (g 2). There are two basic interpretations of "in connection with the purchase or improvement of." In Revenue Ruling 87-22, the IRS rules that points incurred in refinancing a mortgage on a taxpayer's residence are deductible in the year paid to the extent that the taxpayer uses the loan proceeds to improve the taxpayer's residence. Thus, points paid to simply refinance an existing mortgage without improving the residence must be amortized over the life of the loan. In contrast, in J.R. Huntsman v. Comm., the 8th Circuit Court interpreted the phrase "in connection with the purchase or improvement of" much more broadly and held that points incurred to refinance a mortgage on the taxpayer's principal residence are currently deductible if the refinancing represents an integrated step to secure permanent financing for the taxpayer's residence. The facts in J.R. Huntsman v. Comm. are very similar to Bill and Mercedes's facts. Like Bill and
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