SCENARIO: You
are a CPA with an office in NearLakes City and clients consisting primarily of
professionals, entrepreneurs, and small business owners. John Smith, Esq., a
practicing attorney with offices near yours, walks in your office and wants
advice from you relating to a recent influx of cash he received as a result of
winning a large jury verdict on behalf of his client in a personal injury case.
His wife Jane Smith accompanies him during your meeting because she has some
additional tax planning advice to ask of you.
ROLE: After
reviewing John and Jane Smith’s points of view, it will be your turn as a tax
professional to decide on the best course of action from a tax perspective on
their issues. Prepare a three page memo (at least 900-1,500 words per page) to
John and Jane Smith addressing the issues presented.
PLAYERS: JOHN SMITH ESQ.
âI worked on this case for over two
years. The jury awarded my client $2,000,000 in damages, of which my fee was
$300,000 plus recovery of expenses paid up front in the amount of $25,000. How
is the $300,000 taxed? What about the $25,000? What can I do to minimize the
tax consequences of each? Also, I am thinking about buying the building that I
currently lease my office space in. My current lease is $3,500 per month. How
is this lease reported on my income tax returns (either personally or for my
business which is a separate law practice established as an LLC)? Do I get
better tax benefits for paying the lease or for buying the building? What are
the differences?â
PLAYERS: JANE SMITH-PROFESSIONAL
âI think that the fees would be better used for
paying off our house and buying a new, bigger house that I’ve had my eye on.
Does it make better tax sense for us to pay off the mortgage, sell the house,
and buy a new house, or should we just use the money to buy the new house after
selling the old house? Also, I sell handcrafted jewelry which earned me $20,000
last year. Do my business activities constitute a trade or business for federal
income tax purposes? Or, is this just a hobby? Should I establish a separate
trade or business to get tax benefits on these earnings? Does it make any
difference that I use my car primarily for transporting my jewelry to different
shops around town? Finally, I think I can earn more money if John were willing
to invest $15,000 for new jewelry making equipment since my original equipment,
which cost $10,000 five years ago, is almost obsolete. Does this make sense
from a tax perspective?â
Given the
scenario, your role and the information provided by the key players involved,
it is time for you to make a decision.
If you are finished reviewing this scenario,
close this window and return to this week’s You Decide item, in your course
window, to complete the activity for this scenario.
You can return and review this scenario again at
any time.
Prepare a three-page
memo (at least 900-1,500 words per page) to John and Jane Smith addressing the
issues presented:
John Smith tax issues:How is the $300,000 treated
for purposes of federal tax income?How is the $25,000 treated for
purposes of federal tax income?What is your determination
regarding reducing the taxable amount of income for both (a) and (b)
above?Is it more beneficial to
continue leasing the business space or to buy the building?Jane Smith tax issues:What are the different tax
consequences between paying down the mortgage (debt) and assuming a new
mortgage (debt) for federal income tax purposes?Can John and Jane Smith
utilize a 1031 tax exchange to buy a more expensive house using
additional money from John’s case?Does Jane have a business or
hobby? Why is this distinction important?Would Jane (and John) realize
better tax benefits if she had a separate business for her jewelry-making
activities?What tax benefits would John
realize if he invested $15,000 in Jane’s jewelry making?Can Jane depreciate her
vehicle or jewelry-making equipment? How?John and Jane Smith tax issue:Should John and Jane file
separate or joint tax returns?
You
Decide: It’s your turn as a tax professional to decide on the best course of
action from a tax perspective on their issues as presented above.
For each issue, begin by
restating the issue and numbering as shown above [i.e., 1(a), 1(b), etc.].
Next, explain and discuss the tax rules that apply to the issue, which you
gleaned from your tax research. Then, conclude with a definitive answer to the
issue, supported by citations to the sources used. So for each issue,
you should
state the issue;explain and discuss the
applicable law (IRC sections, regulations, court decision, and so forth);
andpresent your answer in the form
of a concluding paragraph that refers to specific language from
the IRC sections, regulations, court decisions, and other sources (if
applicable) to support the conclusion.
*A template has been
provided for your use in preparing this activity. Please use it!
Citations
Citations
are required. You
must provide citations whenever you refer to the sources of tax law used in
this memorandum. You may cite your sources in numbered footnotes, numbered
endnotes, or in parentheses immediately after the sentence mentioning the cited
source.
Grading
Rubric
Category
Points
Description
Superior
100â125
Content and subject: Easily
identifiable, clear; meets or exceeds page or word-length requirement; all
required citations are provided
Structure: Apparent, understandable, and applicable; excellent
flow and well structured
Analysis:Interesting and novel; provides different perspectives;
demonstrates critical thinking and critical analysis at a high level
Mechanics: Virtually devoid of errors in grammar, syntax,
punctuation, and spelling
Achieving
80â99
Content and subject: Concrete
overall, but may be slightly unclear; meets or exceeds page- or word-length
requirement; some citations missing
Structure:Generally clear and appropriate
Analysis: Evidence relates to the content; evidence may lack some
clarity; critical analysis and critical thinking apparent
Mechanics: Good sentence structure (syntax), grammar,
punctuation, and spelling, with minor errors
Average
65â79
Content and subject: Fairly easy to
read and understand, but paper meanders from topic or lacks cohesion or
content; meets page- or word-length requirement; missing most citations
Structure: Overall good, with minor shortfalls
Analysis: Some critical thinking, but minimal or no analysis or
further discussion by the adult learner
Mechanics: Sentence structure has some errors relative to syntax,
grammar, punctuation, and spelling
Below Average
< 65 Content and subject: Often unstructured and vague; content not totally applicable to the paper's requirements or introduces substantial material not relevant to the assignment and/or the relevant discussion points; no citations provided for tax law research Structure: Mostly unclear and difficult to visualize Analysis: Very limited with no analysis or further discussion by the adult learner that demonstrates adult learner critical thinking/analysis Mechanics: Numerous mistakes in sentences, paragraph formatting, spelling, and grammar that subtract from the content of the paper; writing errors suggest minimal likelihood that paper was proofread for errors prior to submission; writing not at graduate level
