General Information
This assignment is designed to get you thinking about tax research and give you a little practice with a key tax resource. Given the volume of rules that comprise our federal income tax system, it is impossible for one person to know everything about taxes. Instead, tax practitioners generally gain a basic understanding of key components of the tax computation and a more thorough understanding of their area of specialization. To complement this understanding of the rules, tax practitioners must also possess the ability to find answers to questions that extend beyond their knowledge. This assignment will give you some insight to the basic process that tax practitioners use to perform tax research.
Requirements
1. You will be given a hypothetical scenario about a client (see below). You will look in Chapter 2 of your textbook for information on how to conduct tax research. You may also wish to look at the supplemental PowerPoint presentations posted on Blackboard Learn under the Research Project folder for additional guidance.
2. You will search the tax code, regulations, and court cases to find an answer to your client's situation. Stick to sources of primary authority (defined in Chapter 2) whenever possible. The Bruno Library offers several electronic databases that students may use to browse various tax authorities. Links to these databases are provided at https://guides.lib.ua.edu/c.php?g=300096&p=2004261#s-lg-box-wrapper-7746286.
3. You will write a memo to the working paper file (two pages or less) noting the tax consequences for your client (whether the item is income or not, whether the expense can be deducted or not, etc.) to turn in on or before the assigned due date. This document should cite the relevant tax code, regulations, and cases that you used in making your determination.
4. If you have any questions, please let me know ([email protected]). An example of a research memo has also been posted under the Research Project folder to offer guidance on formatting, language, etc.
Your assignment will be assessed on the following basis:
(i) Organization with respect to format and neatness.
(ii) Completeness (answer to client's situation, relevant tax authorities).
(iii) Communication skills are necessary for a successful professional career. Treat your memo to the file as professional communication; thus, your memo or letter should be free of spelling, grammar, or punctuation errors.
(iv) Remember, this is an individual assignment. You may ask general questions of each other, and you may work together to find relevant authorities in the CCH Tax Research Network, RIA Checkpoint, etc. However, the memo you turn in describing your solution must be your own work. If you have questions or issues, please let me know.
Hypothetical Taxpayer Information
Scott and Kourtney Smith are married and have been clients of Footem and Filem, LLP (F&F) for the past few years. Kourtney is an elementary school teacher. Scott owns a real estate business, Smith Realty, which he operates as a sole proprietorship.
In January of this year, Scott was hired to sell a home in Withering Heights, an upscale neighborhood located in the dusty plains of Lubbock, TX. Withering Heights offers several amenities (a pool, walking trails, common areas, etc.) that are governed by the neighborhood homeowner's association. The homeowner's association consists of four officers (President, Vice President, Treasurer, and Secretary) who are elected by the residents of Withering Heights each year. All of the officers are active in the community and take their roles in the homeowner's association very seriously. They are also authorized to issue fines on behalf of Withering Heights for violations of its bylaws, which include many rules designed to preserve the neighborhood's clean and uniform appearance.
To help sell his client's home, Scott placed several signs in high-traffic areas around Withering Heights on January 11th. These signs provided Scott's contact information and advertised the home's location and unique features to prospective buyers. However, Scott was unaware that placing his signs around the neighborhood was a direct violation of the Withering Heights bylaws. The Withering Heights homeowner's association fined Scott $100 per day for 10 days until he finally returned to the neighborhood on January 20th to retrieve his signs. Scott paid the $1,000 fine on January 21st and issued a personal apology to the Withering Heights homeowner's association, hoping that he could continue to do business with the neighborhood's wealthy residents in the future.
Based on the facts above, what amount of the $1,000 fine, if any, can Scott deduct as a business expense for federal income tax purposes? Assume you work for F&F and Scott and Kourtney Smith are your clients. Prepare a brief research memo, complete with citations and analysis of primary authority, to support your conclusions. Remember that Scott and Kourtney are not professional tax preparers, so it is important that you explain your position in a clear and concise manner that is not overly technical (i.e., do not copy and paste excerpts from primary authorities and call it a day).