Spring 2013 – Tax Memo Assignment

Topics: Citation, Taxation in the United States, Rational-legal authority Pages: 7 (1904 words) Published: August 30, 2013
ACCT 411 – Spring 2013 – Tax Memo Assignment
Due: 3/28/13

Facts of the Case:

Your firm is working on the 2012 tax return for your clients, Robert and Catherine Tate, a married couple who have filed a joint return for many years. Robert is 67 years old and retired. Catherine, 63, still works part-time as a licensed real estate broker and she worked 625 hours in that capacity during 2012.

The couple actively own and operate three apartment buildings that produced the following financial results for 2012:

| 112 Willow Street| 422 2nd Avenue| 1352 W. Harmon Avenue| Rents Received| $28,800| $58,500| $82,000|
Rental Expenses| 44,000| 66,000| 74,000|
Rental Profit or Loss| -15,200| -7,500| 8,000|

The rental market has been depressed recently and the Willow and 2nd Avenue properties are newer and less established. Significant losses occurred with those properties due to vacancies during the year, extensive cleanup costs, and some eviction and nonpayment experiences. The couple acquired the Willow and 2nd Avenue properties very early in the 2012 tax year. In prior years they had only the Harmon property. They have never made any particular tax elections regarding their rental properties because they only had one property in the past.

Although the couple does hire outside people to help with some of the maintenance and legal issues, the couple does actively manage and work on these properties. Most of the working hours were performed by Robert but Catherine also worked some hours on managing and maintaining the properties. Their time spent on the properties during 2012 is well documented and consists of the following number of hours by each person:

| 112 Willow Street| 422 2nd Avenue| 1352 W. Harmon Avenue| Hours worked by Robert| 200| 120| 60|
Hours worked by Catherine| 100| 30| 20|

Other income of the couple is as follows:

Taxable pension income| 85,000|
Catherine’s commission on real estate sales| 30,000|
Taxable social security income| 38,500|
Other taxable investment income| 17,000|
Total Adjusted Gross Income w/o rental| 170,500|

Your boss, Clem Hartley, knows that rental activities are considered passive with a special allowance but doesn’t think the Tates can deduct their rental losses against their other income because of their income level. He is vaguely aware of an exception for professional real estate tradespersons and asks you to look into those provisions to see if those provide some relief for the taxpayers. After examining those provisions, you are also requested (excuse me, ORDERED!) to provide advice for what the taxpayers might do to be able to qualify for relief under those provisions for the current year or any subsequent years if losses become recurring (Remember, they are always free to reject your advice even if it is sound).

Suggested Legal References and Authorities:

IRC Section 469
Nelson, Andre, (2004) TC Summary Opinion 2004-62; Jahina, Karl, (2002) TC Summary Opinion 2002-150)

Go to RIA Checkpoint available in the electronic resources section of the MSU library (available on the main Web page). Go to Library Resources – Electronic Resources – A-Z Resource List – and pick “R” to find RIA Checkpoint. On the left side of the page you will find a “Find by Citation” link. Click that link. You will find separate links under that menu heading for finding Internal Revenue Code sections and court cases. You can call up the above documents from their citations. When you call up Code Section 469, RIA will have buttons labeled “FTC” or something like that next to the various provisions of the Code section. Clicking these will take you to supplementary explanatory materials from RIA and primary legal authorities that have interpreted and explained these Code provisions. You will need to consult these supplementary authorities and explanations.

I have detailed instructions for the structure of the...

References: Nelson, Andre, (2004) TC Summary Opinion 2004-62; Jahina, Karl, (2002) TC Summary Opinion 2002-150)
Go to RIA Checkpoint available in the electronic resources section of the MSU library (available on the main Web page)
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