Question - Your client, Fred Mertz, is a calendar-year, cash method taxpayer. He is the landlord of a building and is looking to sign a three-year lease with Ricky Ricardo. Ricky will move in December 1, 2017 and move out November 30, 2020. They are considering several options that Fred has asked you to evaluate. For purposes of your analysis assume that all payments will be made on time under the terms of the lease.
Option 1 Ricky has offered to sign the lease on December 1, 2017. The terms of the lease are: the monthly rental is $2,000 payable on the first day of the following month and there is a $4,000 security deposit payable at the time the lease is signed that will be refunded at the end of the lease. (Hint: look for a 1990 Supreme Court case).
Option 2 Ricky has offered to sign the lease on November 30, 2017. The terms of the lease are: the monthly rental is $2,000 payable on the first day of each month and there is a $2,000 security deposit payable at the time the lease is signed that will be applied to the last month of the lease. (Hint: look for a Regulation).
Option 3 Ricky has offered to sign the lease on December 1, 2017. The terms of the lease are: the annual rent is $23,000 payable on the date the lease is signed and on the anniversary date every year thereafter and there is no security deposit.
Write a memo to Fred Mertz detailing the amounts that will be included in his gross income for Years 1, 2, 3, and 4. Include an explanation of your analysis as well as any non tax considerations you recommend he consider. It is not necessary to perform any additional computations since Fred is cheap. Once Fred decides which lease option to choose, he may ask you to perform further analysis. Be sure to let him know he has this option.
Prepare a tax research memo addressing the question that has been raised.
You will need to support your conclusion using primary sources of tax law. Your textbook is NOT primary authority.