Brief summary of the relevant law, and finally the tax treatment for that tax issue

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Tax Research Memo

Purpose: There are two purposes/goals for this assignment. First is to read and understand authoritative literature (tax law). The second is to practice professional writing.

Assignment:

The firm’s client has several transactions and is questioning the tax treatment. This client is very detail oriented. Your manager has asked you to write a memo for the files stating the tax issues/facts, relevant law, and tax treatment. Your manager has told you to format the memo as a list. Each item on the list includes one tax issue with related facts, law citation(s), brief summary of the relevant law, and finally the tax treatment for that tax issue. The manager emphasized only tax issues are to be included in the memo.

The client is Tons of Fun Toys, Inc. (TFT), which Marco opened for business in 2008 as a corporation. TFT produces wooden toys – spinning tops and block sets. Business has been going very well for him, and he has provided the following information relating to his business and is concerned about how these transactions will affect his 2015 taxable income.

  • Marco had previously operated his business out of his garage, but in January 2015 he decided to rent a larger space. He entered into a lease agreement on February 1, 2015 and paid $14,400 ($1,200 per month) to possess the space for the next 12 months (February 2015 of this year through January 2016 of next year).
  • In March 2015, TFT sold 5,000 toys to Big Box Stores, Inc. (BBS), a large national retailer, for $75,000 on credit.
  • In August, at the annual toy industry show TFT sold $120,000 of toys to other various customers on credit.
  • BBS was so impressed with the toys that it purchased in March 2015 that it wanted to contract with TFT to continue to produce toys for them for the next three years. BBS paid TFT $216,000, on October 30, 2015, to produce 250 tops and 250 block sets per month of both for 36 months beginning on November 1, 2015 of this year. The tops and the block sets sell for the same price, $12 per unit. As per the contract, TFT delivered 500 toys on November 30, 2015, and again on December 30, 2015.
  • On August 1, TFT purchased a 12-month insurance policy that covers its business property for accidents and casualties through July 31 of next year. The policy cost TFT $3,600.
  • In December 2015, TFT determined that it would not be able to collect $2,000 of its beginning-of-the-year receivables, so it wrote off $2,000 of specific receivables. TFT estimates that it will be unable to collect 5% of the 2015 sales revenue using the GAAP percentage of net credit sales method.
  • In December, TFT agreed to a 12-month $8,000 contract with Advertise Live (AL) to produce a radio ad campaign. TFT paid $3,000 up front (in December, 2015) and AL agreed that TFT would owe the remaining $5,000 only if TFT’s sales increased by 15% over the nine-month period after the contract was signed.

Requirements:

  1. Prepare a memorandum for the files.
  2. Research the issue using RIA Checkpoint or other tax database. Cite at least one
relevant source of law for each tax issue. For any two issues cite at least two relevant law sources. Citations should be specific (section, subsection, etc.)
  3. The memo must be in good business format.
  4. Your memo, formatted as a bulleted list, must include the following for each

bullet point:

  1. Clear statement of the tax issue and a very brief statement of the facts
related to the issue. (Do not include non-tax issues.)
  2. Citation of the relevant law(s).
  3. A brief summary of the authoritative sources, and any other resource that 
you rely on to address each tax issue. Note: secondary sources are not 
required, but if used, must be cited.
  4. Statement of the tax treatment for the tax issue identified.
  5. Prepare the memo for someone that has limited tax knowledge as it may be relied on to write a letter to the client if necessary.

Guidelines:

  1. Answer must be formatted as a memo for the files. Memo must be business professional tone.
  2. Include your name in the “from” section of the memo.
  3. Please double-space your memos (even though this is not the usual format in 
business).
  4. Length of the memos – maximum of 4 double spaced pages, minimum of 2 
double spaced pages.
  5. Margins must be 1” on all 4 sides of the page.
  6. Answers must address the specific requirements, be well-written, complete, and 
grammatically correct.
  7. The answer you submit must be your own work, and only your work.

2

Grading:

The points associated with each component of the memo are indicated below.

In addition to the table above, points may be deducted for the following reasons:

  •  Not following directions.
  •  Poor organization of the answer (for example, it may read like a first draft that was not proofread.)
  •  Using the exact language of your cited source(s). Use your own words.
Clear statement of the relevant facts and tax issues. 35
Citations 15
Brief summary of the law 30
Tax treatment of the issues. 20

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