Tax Memorandum

Tax Memorandum

Mimi’s Cupcakes Tax Research Memorandum Due Date: Wednesday, December 4, 2019 at 11:59 pm

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Purpose: The purpose of this is to enable you to meet the following goals:

• Understand the role of a tax practitioner • Identify the tax issues involved in a scenario • Be able to conduct comprehensive tax research utilizing on-­‐line tools in order to

formulate a solution to the issues raised. • Be able to articulate and defend a tax position in writing.

Task: In order to successfully complete this assignment you must:

• Prepare a memorandum to the tax manager outlining the information you found in your research.

• Follow the examples of file memoranda can be found at the M. Tx. Writing Website located at M. Tx. Writing Website. Format the memo to include:

o Restatement of Facts (paraphrase) o Identify at least three main issues based on these facts o Provide a conclusion for each issue o Include the analysis that led you to the conclusion for each issue. This

analysis should refer to the primary authority that best addresses the issue.

o Primary authority would include items such as the Internal Revenue Code, Regulations, Court Cases, etc. These also should be paraphrased in order to highlight your understanding of the primary authority and how it relates specifically to the issue.

• Submit the assignment using a Turnitin assignment dropbox. o Turnitin, is an online resource that checks your work against: the submissions of

others, books, articles, tax code, etc., in order to verify originality of your content. Given that everyone in the course is working on the same problem and using the same format, the service will likely find some similarity in your paper. Upon submission you will be able to see your score immediately, as others submit their papers your score may increase. Should you resubmit your paper, the originality score will not be viewable for 12-­‐24 hours.

o I use the information supplied by TurnItIn as well as my professional judgment to determine the originality of your paper.

o As a general rule, however, any memo receiving a Turnitin score higher than 20-­‐25% will be considered plagiarized and earn a grade of 0. I will accept late assignments for no more than 48 hours after the due date, with a 20% penalty.

Mimi’s Cupcakes Tax Research Memorandum Due Date: Wednesday, December 4, 2019 at 11:59 pm

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The writing assignment will be graded based on grammar, style of writing, logical development of ideas, critical thinking skills, and technical accuracy of the analysis and conclusions, using a rubric, which is found below.

Rubric to be used for grading Expert Average Novice

Content 35 points

35 Contains ALL of the following: -­‐All issues identified and thoroughly analyzed; -­‐Conclusion and/or recommendation offered

32 Contains ANY of the following: Identified most of the relevant issues. Conclusions not offered for each issue

28 Contains ANY of the following: Several relevant issues not addressed No conclusions offered

Complete-­‐ ness

20 points

20 Contains ALL of the following: -­‐Thorough analysis -­‐Proper primary authority citation used including items other than code sections.

17 Contains ANY of the following: -­‐Good Analysis most issues addressed -­‐Most issues contain primary authority of Code Sections.

15 Contains ANY of the following: -­‐Did not research important issues; -­‐Incomplete analysis; -­‐ -­‐Primary authority not cited

Readability 25 points

25 Contains ALL of the following: -­‐Well written easy to follow clearly discusses issues; -­‐Followed recommended format.

22 Contains ANY of the following: -­‐Some areas include awkward wording or phrasing; -­‐Grammatical errors; -­‐Did not follow recommended format.

18 Contains ANY of the following: -­‐Difficult to read -­‐Numerous grammatical errors

Mimi’s Cupcakes Tax Research Memorandum Due Date: Wednesday, December 4, 2019 at 11:59 pm

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Your business tax client, Mimi Charpentier, operates a successful sole proprietorship which sells cupcakes to retail customers at three locations in Las Vegas. Mimi’s Cupcakes does not carry any inventories, because of the nature of its products. Mimi owns the three small buildings in which the shops exist. One of the stores is slightly larger than the others; it is Mimi’s original location, and it still is the site of the kitchen and the loading dock where the Cupcakes trucks daily pick up and deliver merchandise and supplies. The work force of each store is the equivalent of 2.5 employees; the employees are paid reasonably well, and the low-­‐pressure atmosphere of the typical workday results in a very low turnover rate. Mimi’s offers only one fringe benefit to the employees – it encourages the employees to use Health Savings Accounts for their medical costs, and Mimi’s reimburses the employee for the out-­‐of-­‐pocket deductible amounts, to a $2,000 maximum per employee per calendar year. Mimi’s attorney, Gloria Willis, has urged Mimi to incorporate the business, primarily because of the limited shareholder liability associated with corporate status, and to facilitate a business succession plan for the operation. After several years of discussions, Mimi has agreed to go ahead with this idea. She will take a sixty percent ownership interest in the common stock of the new entity; twenty percent interests will be made available to Mimi’s daughter Nancy, and to Joan Price, the chief operating officer of the business, who is not related to the other two shareholders. Mimi has operated the business as a cash basis sole proprietorship since 2009, and she anticipates incorporating the business on January 1 of next year. A summarized projected balance sheet for the business as of December 31 is attached.

I

Willis’ practice consists of general work with small business clients. She is not by any means conversant with the federal income tax rules as they apply to individuals and C corporations. In this process, Willis is concentrating on the establishment of the new corporate entity, the retitling of assets as they are transferred from the proprietorship to the corporation, and the mechanics of creating and issuing shares to the new shareholders.

In your interviews with the three shareholders, you discover that Mimi’s life expectancy is about two years from the date of incorporation. Nancy recently graduated from community college in restaurant and hospitality management, with an emphasis in financial recordkeeping. Joan is about fifty years old, in good health, and planning to remain in charge of operating decisions for the three stores for the foreseeable

Mimi’s Cupcakes Tax Research Memorandum Due Date: Wednesday, December 4, 2019 at 11:59 pm

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future. Neither Mimi nor Joan projects that the corporation would add a fourth store, nor would it expand outside of Las Vegas, but the parties review these issues at least once a year.

The proprietorship does not carry any debt; its trade payables and receivables are disposed of in a timely fashion. Its web site allows for remote ordering, scheduled pickups, and deliveries of larger orders to customer locations. Mimi’s is active on Twitter and Facebook, where the company has about five thousand friends. This presence allows Mimi’s to plan and carry out “spontaneous” outdoor events on the stores’ patios, where high-­‐markup products are made available in plentiful quantities.

As Mimi has told you several times, “this is a simple business, and we know how to keep our customers happy and coming back on a regular basis. I do not want the legal etc. aspects of an incorporation to disrupt the good thing that we have here.” But, in your dealings with Mimi over the years concerning her Forms 1040 and employment tax obligations, you know that she expects you to give her suggestions about how her tax liabilities would be affected by decisions that she makes, and that she expects to “get it right the first time” when she makes her choices. At Mimi’s latest appointment with her cardiologist, Cathy Duvall MD mentioned that her own clinic was about to incorporate, but that Duvall would retain her individual ownership of the clinic’s land and building. Duvall was certain that there were tax and legal advantages to structuring the corporation that way, but she could not really explain to Mimi what those advantages were. Required: You will be meeting shortly with Mimi, Nancy, and Joan to discuss the tax aspects of the incorporation, be sure to review the various options available for operating the business and the tax consequences of these options.

Mimi certainly will ask you to cover the issue of which assets to contribute to the new corporation, with the explanations that Duvall could not provide. Concentrate on those issues for this meeting, offering at least two alternative plans for the asset transfers be sure to include computation of tax effect of the alternative plans. At the meeting, Nancy will look to you for information on issues of asset basis, as well as any effects that the incorporation might have on sales/use and self-­‐employment tax obligations. Ignore any exposure to the corporate or individual alternative minimum tax, though.

The “elephant in the room” will be the issue of Mimi’s continued involvement in the business. You should be prepared with some initial suggestions as to business succession planning, and the later transferability of the shares in Mimi’s Cupcakes Inc.

Mimi’s Cupcakes Tax Research Memorandum Due Date: Wednesday, December 4, 2019 at 11:59 pm

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Projected Balance Sheet ($K)

Mimi Charpentier, dba Mimi’s Cupcakes December 31