As long as there’s innovation there is going to be new kinds of chaos,” explains Robert Stephens, founder of the technology support company Geek Squad. The chaos Stephens is referring to is the difficulty we have all experienced trying to keep up with the many changes in our environment, particularly those related to computers, technology, software, communication, and entertainment. Generally, consumers have found it difficult to install, operate, and use many of the electronic products available today. “It takes time to read the manuals,” Stephens says. “I’m going to save you that time because I stay home on Saturday nights and read them for you!”
THE COMPANY
The Geek Squad story begins when Stephens, a native of Chicago, passed up an Art Institute scholarship to pursue a degree in computer science. While Stephens was a computer science student he took a job fixing computers for a research laboratory, and he also started consulting. He could repair televisions, computers, and a variety of other items, although he decided to focus on computers. His experiences as a consultant led him to realize that most people needed help with technology and that they saw value in a service whose employees would show up at a specified time, be friendly, use understandable language, and solve the problem. So, with just $200, Stephens formed Geek Squad in 1994.
Geek Squad set out to provide timely and effective help with all computing needs regardless of the make, model, or place of purchase. Geek Squad employees were called “agents” and wore uniforms consisting of black pants or skirts, black shoes, white shirts, black clip-on ties, a badge, and a black jacket with a Geek Squad logo to create a “humble” attitude that was not threatening to customers. Agents drove black-and-white Volkswagen Beetles, or Geekmobiles, with a logo on the door, and charged fixed prices for services, regardless of how much time was required to provide the service. The “house call” services ranged from installing networks, to debugging a computer, to setting up an entertainment system, and cost from $100 to $300. “We’re like ‘Dragnet’; we show up at people’s homes and help,” Stephens says. “We’re also like Ghostbusters and there’s a pseudogovernment feel to it like Men in Black”
In 2002, Geek Squad was purchased by leading consumer electronics retailer Best Buy for about $3 million. Best Buy had observed very high return rates for most of its complex products. Shoppers would be excited about new products, purchase them and take them home, get frustrated trying to make them actually work, and then return them to the store demanding a refund. In fact, Best Buy research revealed that consumers were beginning to see service as a critical element of the purchase. The partnership was an excellent match. Best Buy consumers welcomed the help. Stephens became Geek Squad’s chief inspector and a Best Buy vice president and began putting a Geek Squad “precinct” in every Best Buy store, creating ...
As long as there’s innovation there is going to be new kinds of ch.docx
1. As long as there’s innovation there is going to be new kinds of
chaos,” explains Robert Stephens, founder of the technology
support company Geek Squad. The chaos Stephens is referring
to is the difficulty we have all experienced trying to keep up
with the many changes in our environment, particularly those
related to computers, technology, software, communication, and
entertainment. Generally, consumers have found it difficult to
install, operate, and use many of the electronic products
available today. “It takes time to read the manuals,” Stephens
says. “I’m going to save you that time because I stay home on
Saturday nights and read them for you!”
THE COMPANY
The Geek Squad story begins when Stephens, a native of
Chicago, passed up an Art Institute scholarship to pursue a
degree in computer science. While Stephens was a computer
science student he took a job fixing computers for a research
laboratory, and he also started consulting. He could repair
televisions, computers, and a variety of other items, although he
decided to focus on computers. His experiences as a consultant
led him to realize that most people needed help with technology
and that they saw value in a service whose employees would
show up at a specified time, be friendly, use understandable
language, and solve the problem. So, with just $200, Stephens
formed Geek Squad in 1994.
Geek Squad set out to provide timely and effective help with all
computing needs regardless of the make, model, or place of
purchase. Geek Squad employees were called “agents” and wore
uniforms consisting of black pants or skirts, black shoes, white
shirts, black clip-on ties, a badge, and a black jacket with a
Geek Squad logo to create a “humble” attitude that was not
threatening to customers. Agents drove black-and-white
Volkswagen Beetles, or Geekmobiles, with a logo on the door,
and charged fixed prices for services, regardless of how much
time was required to provide the service. The “house call”
2. services ranged from installing networks, to debugging a
computer, to setting up an entertainment system, and cost from
$100 to $300. “We’re like ‘Dragnet’; we show up at people’s
homes and help,” Stephens says. “We’re also
like Ghostbusters and there’s a pseudogovernment feel to it
like Men in Black”
In 2002, Geek Squad was purchased by leading consumer
electronics retailer Best Buy for about $3 million. Best Buy had
observed very high return rates for most of its complex
products. Shoppers would be excited about new products,
purchase them and take them home, get frustrated trying to
make them actually work, and then return them to the store
demanding a refund. In fact, Best Buy research revealed that
consumers were beginning to see service as a critical element of
the purchase. The partnership was an excellent match. Best Buy
consumers welcomed the help. Stephens became Geek Squad’s
chief inspector and a Best Buy vice president and began putting
a Geek Squad “precinct” in every Best Buy store, creating some
stand-alone Geek Squad Stores, and providing 24-hour
telephone support. There are now more than 20,000 agents in
the United States, Canada, the United Kingdom, and China, and
return rates have declined by 25 to 35 percent. Geek Squad
service plans are also being sold on eBay and in some Target
stores. The Geek Squad website proclaims that the company is
“Serving the Public, Policing Technology and Protecting the
World.”
THE CHANGING ENVIRONMENT
Many changes in the environment occurred to create the need
for Geek Squad’s services. Future changes are also likely to
change the way Geek Squad operates. An environmental scan
helps illustrate the changes.
The most obvious changes may be related to technology.
Wireless broadband technology, high-definition televisions,
products with Internet interfaces, and a general trend toward
computers, smartphones, entertainment systems, and even
3. appliances being interconnected are just a few examples of new
products and applications for consumers to learn about. There
are also technology-related problems such as viruses, spyware,
lost data, and “crashed” or inoperable computers. New
technologies have also created a demand for new types of
maintenance such as password management, operating system
updates, disk cleanup, and “defragging.”
Page 89
Another environmental change that contributes to the popularity
of Geek Squad is the change in social factors such as
demographics and culture. In the past many electronics
manufacturers and retailers focused primarily on men. Women,
however, are becoming increasingly interested in personal
computing and home entertainment and, according to the
Consumer Electronics Association, are likely to outspend men
in the near future. Best Buy’s consumer research indicates that
women expect personal service during the purchase as well as
during the installation after the purchase—exactly the service
Geek Squad is designed to provide. Our culture is also
embracing the Geek Squad concept. For example, in the recently
discontinued television series Chuck (2007–2012), one of the
characters worked for the “Nerd Herd” at “Buy More” and drove
a car like a Geekmobile on service calls!
Competition, economics, and the regulatory environment have
also had a big influence on Geek Squad. As discount stores such
as Walmart and PC makers such as Dell began to compete with
Best Buy, new services such as inhome installation were needed
to create value for customers. Now, just as change in
competition created an opportunity for Geek Squad, it is also
leading to another level of competition as Staples has
introduced EasyTech services and Office Depot has introduced
Tech Depot services. The economic situation for electronics
continues to improve as prices decline and demand increases.
Consumers purchased 2 million 3D TVs in 2010, and sales of all
consumer electronics exceeded $180 billion. Finally, the
4. regulatory environment continues to change with respect to the
electronic transfer of copyrighted materials such as music and
movies and software. Geek Squad must monitor the changes to
ensure that its services comply with relevant laws.
THE FUTURE FOR GEEK SQUAD
The combination of many positive environmental factors helps
explain the extraordinary success of Geek Squad. Today, it
repairs more than 3,000 PCs a day and generates more than $2
billion in revenue. Because Geek Squad services have a high
profit margin they contribute to the overall performance of Best
Buy, and they help generate traffic in the store and create store
loyalty. To continue to grow, however, Geek Squad will need to
continue to scan the environment and try new approaches to
creating customer value.
One possible new approach is to create new partnerships. Geek
Squad and Ford, for example, have developed a partnership to
help consumers install in-car communication systems. In the
future, Best Buy will offer 240-volt home charging stations for
Ford’s electric vehicle, the Focus. Geek Squad will offer
electrical audits and residential installations for the car owners.
Geek Squad is also using new technology to improve. Agents
now use a smartphone to access updated schedules, log in their
hours, and run diagnostics tests on clients’ equipment. Best Buy
is also testing a “
Solution
s Central” desk, similar to the Genius Bar concept in Apple
stores, and staffing it with Geek Squad agents. Finally, to
attract the best possible employees, Geek Squad and Best Buy
are trying a “results-only work environment” that has no fixed
schedules and no mandatory meetings. By encouraging
5. employees to make their own work-life decisions, the Geek
Squad hopes to keep morale and productivity high.
Other changes and opportunities are certain to appear soon.
However, despite the success of the Geek Squad and the
potential for additional growth, Robert Stephens is modest and
claims, “Geeks may inherit the Earth, but they have no desire to
rule it!”
TAX RESEARCH GUIDANCE
To complete Tax Research Assignments, you will need to
conduct research in the three
areas of primary tax law. Work through the searches below to
learn how to do tax
research. Review these steps each time you begin working on a
new research assignment.
There are many different ways to do research. The list below is
6. one method, but keep in
mind it is not the only way to find documents. If an area is new
to you, you may wish to
use Google first, to see what others say on the topic and figure
out what kinds of
authority might exist on the issue. The power of Google is that
it can quickly pinpoint an
IRS Code citation or Revenue Ruling or Procedure on your
issue. However, as you may
know, Google can turn up anything on the internet, and might
lead you to sites that have
incorrect, outdated, or misleading information. Exercise your
good judgment
accordingly, and in this class, for your research projects and
homework, only cite to
information you obtained from the internet sites listed below
which have been shown to
7. be trustworthy. In other words, feel free to use Google as a way
to learn what Code
sections or administrative materials may apply. But then use a
more reliable internet site
(such as UMUC's library) to actually provide you with the text
that you will evaluate and
cite.
Once you get a sense of the topic, and maybe even a code
section or other citations, you
can turn to LexisNexis (in the Tax Law library) to pull up
specific legislative,
administrative, or judicial authority. As a future professional
and a member of this class,
the following three areas of primary tax law (legislative,
administrative, and judicial) are
8. the types of authority you should rely upon and discuss in your
research work.
1. Legislative Authority
Internal Revenue Code (IRC)
a. CHECKPOINT and INTELLICONNECT are widely used tax
research services.
These services require a subscription. You are certainly free to
use them if you have
access to them. However, the resources discussed below are
available to you free of
charge and should be adequate to your research needs in this
course.
Lexis/Nexis Academic – available through the UMUC electronic
library: Lexis/Nexis
9. combines many tax resources in one spot and offers fast, up-to-
date information. Your
future employers may expect you to be familiar with Lexis (or
its rival, Westlaw) so
take the time now to learn how it works:
www.umuc.edu.
Link to Library.
Link to “Subject Guides”.
Link to “Accounting”.
Under the Most Recommended Resources bar, link to
“LexisNexis Academic”.
Enter your username and password (if necessary).
On the Left Menu Bar, click on Research
Guides
10. Under Academic URLs, click on
http://www.umuc.edu/
Accounting and Tax Law Links.
In the red box, enter your search terms and click search. Try
“ordinary w/3 necessary”
(but omit quotation marks). This search should bring up a
number of IRC sections.
In the “Show” box, you can click on KWIC (Key Word in
Context) to see portions of your
retrieved documents with your search terms highlighted. This
will help you to decide
whether a retrieved document might be relevant to your research
objective. One document
11. in your retrieved list is §162 Trade or Business Expenses. In
the “Show” box you can
click on Full to display the full document., which is the entire
IRC section.
b. Cornell website: If you know what code section you are
looking for, one of the fastest
ways to find it is through Cornell University Law School’s
website at this link:
http://www.law.cornell.edu/uscode/ But note that the Code on
Cornell’s website may not
be current enough for research assignments. Lexis/Nexis is a
current database. If you put
“26” in the Title box and the Code section in the section box
and hit Go, you can retrieve
the specified Code section.
2. Administrative Authority:
12. a. Treasury Regulations (Regs);
b. Revenue Rulings (Rev. Rul.);
c. Revenue Procedures (Rev. Proc.);
d. Private letter rulings (PLR)
When looking for administrative materials where you do not
have a citation, you can start
by putting key words into the search function at the IRS.gov
homepage. If regulations or
rulings have been published on the issue, they will usually pop
up here. The IRS
publications can also be helpful in providing an overview, but
they are not considered
primary authorities.
a. Treasury Regulations
13. If you know the regulation citation, some direct ways to pull it
up are:
G o t o :
www.irs.gov
Link to Help & Resources on the tool bar at the top of the page
Link to Tax Code and Regulations on the left side of page
Under Treasury (Tax) Regulations
Link to Go under Table of
Contents
Leave IRS website
Under actions on the left side of the page, click on browse Code
of Federal Regulations.
Under Related Resources, click on the link to Electronic Code
of Federal Regulations
(e-CFR)
14. Scroll down to Title 26 and hit Go. This will take you to a list
of links to Treasury Tax
Regulations. You can search the CFR by clicking on search
options on the left.
Or
Go to “LexisNexis Academic” in the UMUC electronic library.
http://www.law.cornell.edu/uscode/
http://www.irs.gov/
Under Academic URLs, select Legal Links.
Click on Statutes, Codes & Regulations.
Click on Code of Federal Regulations.
In the Quick Find box, enter your citation, e.g., enter 1.61, and
c l i c k F i n d .
15. Treasury Regulation 1.61-1 on Gross Income will be retrieved.
Generally, we will use
regulations with the number 1. Internal Revenue Code section
61 is the definition of
gross income. Treasury Regulation 1.61-1 further provides for
this law on gross income.
An example of proper citation of a Treasury regulation is
Treasury Regulation § 1.61–
9(c).
b. Revenue Rulings
How to research a Revenue Ruling:
Go to www.umuc.edu.
LexisNexis Academic database.
Go to Tax Law
16. Content.
Click on “IRS Bulletins, Rulings, & Memoranda Decisions
Combined”
In the Search box enter, e.g., Rev. Rul. 99-7.
Search. One of the documents retrieved is the Revenue Ruling.
Several results turn up related to the issue discussed in the
Revenue Ruling.
Please see the Internal Revenue Manual
http://www.irs.gov/irm/part4/irm_04-010-
007.html for details on the proper citation of primary tax
authorities, including revenue
rulings in the Internal Revenue Bulletin (I.R.B.) and Cumulative
Bulletin (C.B.). If the
above link does not take you to the Internal Revenue Manual
4.10.7.2 Researching Tax
17. Law, copy the link and paste it into your browser. This should
work. You are expected to
use the proper citation form in your research projects. An
example of proper citation of a
revenue ruling appearing in the I.R.B. is Rev. Rul. 96–55,
1996–49 I.R.B. 4. Internal
Revenue Bulletin No. 1996–49 was issued December 2, 1996.
Revenue Ruling 96–55 is
found at page 4. An example of proper citation of a revenue
ruling appearing in the C.B.
is Rev. Rul. 63–107, 1963–1 C.B. 71, 74, which directs the
reader’s attention to page 74 of
Rev. Rul. 63–107 found in volume 63–1 of the Cumulative
Bulletin, starting on page 71.
1. The I.R.B. is the authoritative instrument of the
Commissioner of Internal Revenue for announcing
18. official IRS rulings and procedures and for publishing Treasury
Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published on a
weekly basis by the Government Printing Office.
2. It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a
uniform application of the tax laws, including rulings that
supersede, revoke, modify, or amend any of
those previously published in the Bulletin. All published rulings
apply retroactively unless otherwise
indicated.
3. The C.B. is a consolidation of items published in the weekly
I.R.B. The C.B. is issued on a semiannual
basis. The C. B. is number 1 to 5, inclusive (April 1919 to
December 31, 1921); and I–1 and I–2 to
XV–1 and XV–2, inclusive (January 1, 1922, to December 31,
1936) . Each Cumulative
Bulletin number thereafter bears the particular year covered, for
19. example, 1963–1 (January 1 to June
30, 1963).
c. Revenue Procedures
Research a Revenue Procedure:
http://www.umuc.edu/
http://www.umuc.edu/
http://www.irs.gov/irm/part4/irm_04-010-007.html
http://www.irs.gov/irm/part4/irm_04-010-007.html
For e.g., try to find Rev. Proc. 2010-27.
Follow the same steps as for the Rev. Rul. above, but search for
Rev. Proc. 2010-27,
using the LexisNexis database.
In the Search box, enter Rev. Proc. 2010-27.
20. Search.
Search results turn up cites related to the Rev. Proc., including
the Rev. Proc. itself.
An example of the proper citation format for a revenue
procedure is Rev. Proc. 97-19,
1997-1 C.B. 644. You are expected to use the proper citation
form in your research
projects.
d. Letter Rulings
How to research Letter Rulings:
Same steps as above to access LexisNexis database.
Link to “Tax Law Content”.
21. Click on “IRS Bulletins, Letter Rulings, & Memoranda
Decisions,
Combined”
In the Search Box, enter, e.g., PLR 200607003.
Search.
Private Letter Ruling 200607003 appears.
An example of the proper citation format for a letter ruling is
Ltr. Rul. 200130006 (July
30, 2001). You are expected to use the proper citation form in
your research projects.
3. Judicial Authority
How to find Federal Court Opinions and how to make sure the
opinions are still good
22. law.
Research Court Opinions
a. US Tax Court
Access Lexis/Nexis as described above.
Link to “Tax Law Content:
Click on Federal Cases and IRS Administrative Decisions
Click on Look Up a Legal Case and enter the case citation in
the Search Box, enter, e.g.: TC Memo.1998-220. Search.
Heitz v. Comm’r. will display
Next, in the box labeled Next Steps in the upper right corner,
click on the down arrow and select Shepardize.*** Hit Go.
23. Click on subsequent appellate history. You will notice that
the Heitz case was reversed by the 7
th
Circuit in Exacto
Spring Corp. v. Comm’r., 196 F.3d 833 (1999)
***On the upper right-hand side, look for the blue link
“Shepardize”. Shepards is a
service that tells you instantly if a case is still good law, or if it
has been criticized or
overturned. Click on the blue “Shepardize” link and see what
has happened to this case.
An example of the proper citation format for a Tax Court
24. decision MedChem Products,
Inc., 116 T.C. 308 (2001). You are expected to use the proper
citation form in your
research projects.
b. US Supreme Court
You could find a Supreme Court opinion using LexisNexis as
described above. Enter the
citation 506 U.S. 523. This citation is telling you that the case
is reported in US
Reporter volume 506, starting at page 523 of that volume.
Supreme Court opinions are also available on the Supreme
Court’s website. Go to
www.supremecourt.gov, and in the search feature, type in 506
U.S. 523. This will give
25. you a link to various US Reporter volumes. Click on 506, then
scroll down to page 523
for the opinion.
Tax cases are also decided by Federal District Courts, the U.S.
Court of Claims, and U.S.
Courts of Appeals. An example of the proper citation format
for an appeals court decision
is Graham v. Commissioner, 6 F.2d 878 (4th Cir. 1964). An
example of the proper citation
format for a district court decision is Ruby Smith Stahl v.
United States, 294 F. Supp 243
(D.D.C. 1969). An example of proper citation format for a
Court of Claims decision is
Uptown Club of Manhattan, Inc. v. United States, 83 F. Supp.
823 (Ct. Cl. 1949). When
you find a relevant tax case, the heading will include a proper
26. citation to the case. For
more detail on researching and citing primary tax authorities,
see the Internal Revenue
Manual, 4.10.7.2 Researching Tax Law,
http://www.irs.gov/irm/part4/irm_04-010-
007.html#d0e76.
Tax research is a skill that is developed through practice. As
you practice with various
services, such as LexisNexis, you will become more adept at
discovering relevant
authorities on tax research questions that you may encounter.
Do not expect to master tax
research skills immediately, but commence your acquaintance
with those databases that
contain the relevant information, and you will learn and
improve as you go along.
28. term capital gain, on which the tax rate is 15%, rather than
reporting it as ordinary income, on
which you would be required to pay your 35% marginal tax rate.
Issue
The issues are (1) whether lottery winnings can be taxed at the
long-term capital gains tax
rate, and (2) whether selling the right to the cash flow from the
winnings for a lump sum after
owning the right to such cash flow for more than one year
qualifies for long-term capital
gains tax treatment.
Rule
Lottery rights are not a capital asset, and selling those rights,
even after holding them for over
one year, falls under the “substitute for ordinary income
doctrine, which provides that when a
party receives a lump sum payment as essentially a substitute
for what would otherwise be
received at a future time as ordinary income, that lump sum
payment is taxable as ordinary
income as well.” R.W. Womack v. Comm’r, 510 F. 3d 1295
29. (11th Cir. 2007).
Analysis
It is well established that Lottery rights are not a capital asset.
Watkins v. Comm’r, 447 F. 3d
1269 (10th Cir. 2006); Lattera v. Comm’r, 437 F. 3d 399 (3d
Cir. 2006), cert. denied, 127 S.
Ct. 1328 (2007); United States v. Maginnis, 356 F. 3d 1179 (9th
Cir. 2004); Davis v. Comm’r,
119 T.C. 1 (2002). Although 26 U.S.C. §1221 defines Capital
Asset quite broadly, and does
not specifically except lottery winnings from the definition, the
11th Circuit has found that
“the statutory definition of capital asset has never been read as
broadly as the statutory
language might seem to permit, because such a reading would
encompass some things
Congress did not intend to be taxed as capital gains.” Womack,
510 F.3d 1295; Maginnis, 356
F.3d at 1181;. All of these decisions are based on the so-called
substitute for ordinary income
doctrine, which provides that when a party receives a lump sum
payment as “essentially a
substitute for what would otherwise be received at a future time
as ordinary income, that
30. lump sum payment is taxable as ordinary income as well.”
Comm’r v. P.G. Lake, Inc., 356
U.S. 260, 265, 78 S. Ct. 691, 694 (1958). Womack, 510 F.3d
1295. The courts have focused
on two significant factors in determining that lottery rights are
not a capital asset and,
therefore, the sale of such asset would not constitute a long
term capital gain:
1. The taxpayer did not make any underlying investment of
capital in return for the receipt of
the lottery right, and
2. The sale of the right did not reflect an accretion in value over
cost to any underlying asset
held by the taxpayer.
The first factor goes to the treatment of the initial distribution
of the winnings and, to quote
the 11th Circuit, “Lottery Rights are a clear case of a substitute
for ordinary income. A lottery
winner who has not sold the right to his winnings to a third
31. party must report the winnings as
ordinary income whether the state pays him in a lump sum or in
installments.” 26 U.S.C.
§165(d). As to the second factor, the court focused on the
difference between lottery rights
and “the typical capital asset,…shares of stock. [In the case of
stock], the taxpayer makes an
underlying investment in the stock, owns the shares for longer
than a year, and then sells
them at a higher price. The gain represents an increase in the
value of the original investment.
Lottery rights involve no underlying investment of
capital…[and] gain from their sale reflects
no change in the value of the asset. It is simply the amount [the]
taxpayers would have
received eventually, discounted to present value. Furthermore,
when a lottery winner sells
lottery rights, he transfers a right to income that is already
earned, not a right to earn income
in the future. A capital asset has the potential to earn income in
the future based on the
owner’s actions in using it. Lottery winners, by contrast, are
entitled to the income merely by
virtue of owning the property.” Womack, 510 F.3d 1295.
32. Conclusion
Based on the analysis above, it is clear that, notwithstanding the
sale of the remaining
payments for a lump sum after owning them for more than one
year, you will have to pay
income taxes on the $1,000,000 at your 33% marginal rate. Any
other action will ultimately
result in your owing interest and penalties to the IRS.