Corporate Tax Case Study
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.
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. “I 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? ” PLAYERS: JANE SMITH-PROFESSIONAL “I 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? ” 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: 1. John Smith tax issues: a. How is the $300,000 treated for purposes of federal tax income? b. How is the $25,000 treated for purposes of federal tax income? c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? d. Is it more beneficial to continue leasing the business space or to buy the building? 2. Jane Smith tax issues: a. What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for federal income tax purposes? b. Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John’s case? c. Does Jane have a business or hobby? Why is this distinction important? d. Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry-making activities? e. What tax benefits would John realize if he invested $15,000 in Jane’s jewelry making? f. Can Jane depreciate her vehicle or jewelry-making equipment? How? 3. John and Jane Smith tax issue: a. 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 1. state the issue; 2. explain and discuss the applicable law (IRC sections, regulations, court decision, and so forth); and 3. present 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 100–125 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 80–99
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 65–79 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