Stephen Colbert is the founder of Prescott Pharmaceuticals, a general partnership in which he, his wife and Jimmy Intern all own as one-third general partners. Prescott Pharma has turned into a profitable business. Stephen materially participates in the management of Prescott Pharma.
Stephen also owns two rental properties. The first is a warehouse in a small industrial park where he currently does most of the Prescott Pharma manufacturing and management. This building is owned by Stephen personally and rented to Prescott.
The second rental property was a condo on the west coast of Florida that Stephen rented out to tourists from the Midwest US looking to spend a week on the Florida beaches. Unfortunately, Stephen’s beach condo was also the victim of some really nasty oil gook buildup as a result of the BP/Gulf of Mexico oil leak. In 2012, Stephen’s Florida condo generated a loss of $20,000. Stephen and his wife file jointly and have income well in excess of $400,000 from his talk show salary and in previous years were unable to deduct any of the losses from the condo.
This year (2012); however, Stephen has approached you with an idea. Now that Prescott is generating profits, he is going to raise the rent on the building he leases to Prescott and generate $20,000 of income. His perspective is that the income he generates from his lease of the building to Prescott will offset his losses from the Florida condo. He has come to you for advice on this issue.
Your responsibilities:
Prepare two documents (but submit in a single (that’s ONE) file): (1) a tax research memorandum that provides your opinion on the proper treatment the rental income and losses under Stephen’s plan and (2) a letter to Stephen describing whether his plan will work or not. Stephen is not a tax expert and so your letter to him should not contain any tax jargon or technical citations.
You will need to support your conclusion using primary sources of tax law. These are listed in Exhibit 2-5 of your textbook. Pay close attention to both Exhibit 2-6 and the Taxes in the Real World box on p. 2-11. Your textbook is NOT primary authority.
You must use proper citation form in your memo (see the aforementioned Exhibit 2-5 of your text for help with citation form). A sample of the proper form of a tax research memo can be found in Blackboard under Assignment/Cases and the grading rubric I will employ is also posted. Do yourself a favor and look at the grading rubric before you submit.
The memoand letter should be whatever length you feel is appropriate to resolve the issues. We do NOT use a bibliography or list of references in a tax research memo. You will see that citations are within the text of the document in the example. Once a court case has been cited in full, it can be referred to using simply the name in italics.
You are required to individually prepare this document (no assistance from your classmates). Please upload your memo into Turnitin in Blackboard by the due date (Dec 3rd) 11:30pm.
The grading rubric is posted in Blackboard. For this assignment, points are distributed as follows:
Content – Facts 5
Content – Analysis 15
Content – Conclusion 10
Organization 5
Audience 5
Style 5
Mechanics 5
Referencing 10
Client Letter 20
Total 80
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