Overview
The final project for this course is the creation of a Tax Research Memorandum. The final project consists of answering specific questions raised by your client, and will culminate in a professionally written memorandum that answers the questions and provides substantial support for the conclusions.
Requirements
Suppose your client, Client A, is an unmarried individual U.S. taxpayer living in New York City. She informs you that she recently entered into a settlement agreement with her investment advisor. The investment advisor has paid Client A $150,000. The payment is attributable to investment losses caused by the investment advisor's alleged failure to follow the asset allocation directions from Client A. Specifically; Client A instructed her advisor to change the investment objective for her account from "all equity" to "current income." The advisor understood these instructions to mean reallocate her portfolio from equity to income gradually over time, rather than an immediate sell off and restructuring. Client A claims that her intention was to do an immediate sell off and restructuring. Hence, a dispute arose with respect to the correct interpretation of her instructions and the decline in market value of the equity position over the length of time it took her advisor to gradually sell (restructure) her equity portfolio to income. Client A says this could have been avoided had the change in asset allocation been implemented immediately the way she wanted. In the interests of both parties in settling the dispute without admission of fault by either party, the investment advisor agreed to pay Client A $150,000.
Client A (the payee) wants to know the following:
- Is this settlement payment taxable for federal income tax purposes?
- If so, what is the character of the payment? Is it a reduction of tax basis of investment assets, ordinary income, or short or long-term capital gain income?
In addition, research and address what the income tax consequences are to the investment advisor (the payor) in making the settlement payment. Is the payment deductible, and if so, what is the character of the deduction?
Hint: Recall that income tax consequences in general are symmetrical; meaning that if one taxpayer for a given transaction has to report income, then the other taxpayer to the transaction generally has a deduction.
Prepare a tax research memorandum to answer the questions raised by your client. State any assumptions you make. Your written memorandum should be no approximately six pages in length. Recall that proper format and content are of equal importance. Refer to the Sample Tax Memorandum for guidance on the proper format. This assignment will be graded using the rubric below.
FACTS: This section should include all facts relevant to your analysis and conclusion.
ISSUE(S): This section lists the tax questions that are presented in the facts. A tax researcher must analyze the facts carefully so that all of the questions or major issues are addressed. According to convention, each question should consist of one sentence. This makes questions very difficult to write. If the issue is complex, it may need to be broken down into several separate issues.
CONCLUSION: Your memorandum should include a section that briefly summarizes the conclusions you have drawn from your analysis or discussion.
LAW AND ANALYSIS: This section (some refer to as "Discussion") is the core of the memorandum. It restates each of the issues. Each question is followed by a discussion or analysis in which the writer shows how the tax law (statutes, cases, etc.) applies to the facts in the case. Each question should be answered.