It is early January 2015. Your brother-in-law, Sam Sneed, has been working at the accounting firm (Pittsburgh Accounting Associates, LLC - a partnership for tax purposes) for 15 years now in auditing and is excited to report you that he has been offered a promotion to partner effective as of January 1st, 2015. The managing partner has just taken him to lunch and discussed Sam's increased responsibilities and his targets for billable hours and new clients as a partner. Sam informed you that he will be offered a profits interest. At the time of receipt; the partner's liquidation value in the interest received in zero, so Sam has been told he does not have a capital interest and no research is needed on capital interest. He is excited and wants to stay with the partnership for many years.
Sam has been told he will receive a vested profits interest of $50,000 in 2015, upon receipt, that supposedly may be taxable. You are told to assume that the receipt would be W-2 wages as he was an employee when he received the profits interest if taxable. It will not be treated as a guaranteed payment.
Sam also indicated that there was some chatter in his tax department that the law was unclear on this matter and that he would have to evaluate his tax situation two ways: 1) as if he met a so called safe-harbor; and 2) as if he did not meet the safe-harbor. Sam asks you for guidance on whether the receipt of the profits interest will be taxable or could it be classified as nontaxable. With any potential tax deductions he may get from the partnership now that he is a partner, Sam is not sure it matters. But he trusts you and wants your advice.
You have your own accounting practice and have prepared his tax returns for many years. You must analyze the problem and provide the technical research and support to your brother-in-law. Please complete the necessary federal tax research on this problem and write a tax research paper as provided in the syllabus for Tax Research Paper # 2 that takes into account to the extent relevant statutory, regulatory, administrative, and/or judicial authority on the matter.
Complete tax research on assigned tax problem utilizing the following tax research methodology, and communicate such in a 2 to 3 page paper addressing fully the relevant sections. Each tax research memo should include the following steps:
Step 1: Understand facts
Step 2: Identify issues ("Issue")
Step 3: Locate relevant authorities ("Rule")
Step 4: Analyze tax authorities ("Analysis")
Step 5: Develop Conclusion ("Conclusion")
This is sometimes referred to in accounting and legal practice lingo by the acronym, "IRAC." If this helps you remember the process, great! Just do not forget that in practice the facts are critically important and a critical beginning and reiterative element to the research process.