Tax File Memorandum and Research Essay

Running head: TAX FILE MEMORANDUM AND RESEARCH ESSAY
Tax File Memorandum and Research Essay Name: Professor: Institution: Course Date:
TAX FILE MEMORANDUM AND RESEARCH ESSAY TAX RESEARCH MEMORANDUM ASSIGNMENT 1 September 16th, 2012 TAX FILE MEMORANDUM From: Leakey Jones SUBJECT: Peaceful Pastures Funeral Home Inc.
Peaceful Inc. has received an audit notice from IRS and they, therefore, wants some advice from me on the way to deal with the tax issue on hand. FACTS: Peaceful Pastured Funeral Home, Inc. offers a complete line of funeral services, together with selling goods that are related to the services. After incurring some bad debts and loses, funeral services came up with a program that allowed customers to prepay for the goods and services that will be rendered at their death. As per the terms of the contract, the payments made can be refunded at the request of the customer as long as the goods and services have not been rendered to them. Peaceful Inc. operates as an accrual basis tax payer, and, therefore, these payments together with the income gained are subjected to taxation at the end of the year (Smith, Et al, 2010). ISSUE: Does the money that has been paid in advance by customers under the peaceful program comprise the prepaid income which is taxed as per the year it was received?
TAX FILE MEMORANDUM AND RESEARCH ESSAY CONCLUSION: Peaceful pastures Funeral Home Inc. is only supposed to realize the income in the year that it obtains the prepaid income from the customers, and, not during the time when the goods and services are provided. For this reason, the IRS audit notice is valid and Peaceful pastures
Funeral Home Inc must pay back the taxes owing, together with the penalties and interest on the monies received as advance money in the present and earlier periods. Therefore, the prepaid income that is received by peaceful Inc. through the funeral program is inclusive in the income only when the funeral goods and services are provided (Smith, Et al, 2010). ANALYSIS Based on the accrual method, income is inclusive during the taxable year when all activities that makes it right to receive prepaid income and normal income can be determined without any doubts (Sects. 1.446-1(c)(1)(ii), 1.451-1(a). The suitable method for determining the acceptable tax treatment of a buyers deposit is to check of the basic purpose of the deposit related on all facts and situations. Through the complete dominion test founded in Commissioner v. Indianapolis Power & Light Co.1990, the aspect to discovering such payments through which the tax payer has such authority as to submit the income is to be certain that the taxpayer has assurance that he is permitted to retain the money. As defined in the peaceful program a buyer proving the prepaid income is not obligated to buy the funeral goods and services by any means, and he is entitled to get a refund of the income before the expiry of the contract. As provided in Johnson v. Commissioner 1997, such prepaid incomes are nontaxable during the year of their receipt, and if the buyers right to preserve was subject to his decisions to make any future
TAX FILE MEMORANDUM AND RESEARCH ESSAY judgments to buy services, then, these incomes are applicable to the bill. However, peaceful agreement to preserve the payment is subject upon circumstances that cannot be controlled. TAX RESEARCH MEMORANDUM ASSIGNMENT 2 September 16th, 2012 TAX FILE MEMORANDUM From: Leakey Jones SUBJECT: MegaCorp, Inc. and Business Expense Today, I contacted one of our clients, peaceful MegaCorp, Inc concerning the current
audit notice that was rendered to them by IRS. The client wants to know if it is in order whether the IRS are acting under the law when they told them that they could not approve the $5million payment to Ideas, Inc. as acceptable business expense. According to peaceful MegaCorp, Inc. the $5 million payment should be classified as a capital expenditure, so that, it is not deducted from the income. FACTS MegaCorp, Inc. purchased all the assets and liabilities of Little, Inc. Before the purchase procedure, MegaCorp, Inc. was informed of the patent infringement of Little Inc. with Ideas Inc. MegaCorp, Inc. went ahead and accepted to cater for the damages amounting to $5 million and later subtract it under business expenses. However, according to IRS such an expense should rather be classified under the capital expenditure. This is the reason that MegaCorp, Inc, is asking for some help in order to be certain whether it is entitled to deduct such payment.
TAX FILE MEMORANDUM AND RESEARCH ESSAY ISSUE
Are companies entitled to classify payments as business expense if they incurred such an expense through buying another company? CONCLUSION MegaCorp, Inc is not entitled to treat such a payment as deductable; rather the $5 million payment made should be classified as capital expenditure. ANALYSIS As indicated in Sec. 162, a deduction is considered allowable if only the expense was incurred at the time of taxable year or in the due course of conducting a trade or business. Sorry to say, for the MegaCorp, Inc. accepting the liability of another company cannot be treated as necessary business expense. Together with that, Sec. 263 clearly states that, any payments made for the purpose of purchasing new structures, or for renovation purposes or for improvements meant to add value to either a property or estate is not treated as allowable expense, but, it is rather classified as capital expenditure. Therefore, considering that MegaCorp, Inc. had bought Little, Inc. together with its assets and also accepted the liabilities, then, the infringement liability is supposed to be capitalized in the year of its occurrence (Smith, Et al, 2010). Research assignment 3 Public Traded Partnership (PTP) is a type of partnership formed by limited partners and general partners. Limited partners provide the starting capital for the company, while as, the general partners helps in the management of the company. As defined under the IRS publication 925, there are sets of rules that restrict the amount of loss from a trade, a business, a rental business or even in any other income generating activity (Smith, Et al, 2010).
TAX FILE MEMORANDUM AND RESEARCH ESSAY For the PTP, the rules are applied separate to the income/ loss from a passive activity.
Promoters of these PTPs may claim some benefits, which includes: for purposes of taxation, the income/ dividends are not subjected to taxation, but, are rather treated as return of capital. Some of the Oil and gas ventures that fall under the publicly traded partnerships and that may be subjected to restrictive set of passive loss limitation rules include: Brigadier Oil & Gas Dorado E&P Eclipse Resources As per the loss limitation provision of the PTPs, the loss that is realized is restrictive to the amount of money that a taxpayer has at risk based on those operations at the end of taxable year. Therefore, the deductible loss from PTPs is restricted by the at-risk provisions of IRC section 465. Every separate PTP property is treated as a separate activity for the purposes of subjecting it taxation. In a nut shell, any other loss that is restricted by this section is treated as a deduction in the forthcoming taxable year, as long as there is extra at-risk basis of property in the end (Smith, Et al, 2010).
TAX FILE MEMORANDUM AND RESEARCH ESSAY References Smith, J, Raabem, W, Maloney, D. (2010). South-western federal taxation 2011: Taxation of business Entities, 14th Ed. Cengage learning. Print.

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