Tax Research Assignment 2 Acct 6140 Students Only Fall 2013 Your assignment is to write a professional tax research memorandum that addresses the issue shown below. Mike is a salesperson who represents several companies. On January 2, 2014, he receives by mail a commission check from Produce Packaging Distributors, Inc. in the amount of $13,500 and dated December 30, 2013. Mike is concerned about the year in which the $13,500 is taxable. Although the check is dated 2013, he contends that it would have been unreasonable for him to drive the 55 miles to the Produce Packaging offices on a holiday to collect the check. Further, Mike maintains that even if he had made the trip to collect the check, by the time he returned home, his bank would have closed and he could not have received credit for the check until after the first of the year. In addition, Mike attended classes provided by his church in 2013. He made payments to the church that were required to attend classes. He plans to deduct the payments as charitable contributions to his church on his 2013 tax return. a. Mike would like you to determine whether he should include the $13,500 commission income on his 2013 or 2014 tax return. b. Mike would also like to know if he can deduct the payments to his church as charitable contributions in 2013. Tax Research Memo Format: Title your memo either generally, e.g., Research Memorandum or more specifically, e.g., name of the client and the specific tax situation at hand Address your memo to the client file [include the standard Date, To, From, and Re headings] Organize the body of your memo using the following subheadings: o Facts o Issue(s) o Conclusion(s) o Analysis/Discussion The Facts section should clearly and concisely summarize all relevant facts that may affect the tax outcomes. In particular, include dollar amounts, dates, and names of all parties to transactions. The Issues section should include numbered issues if there is more than one. Write each issue as a question. Include enough of the facts to give context to the question. For example, How much, if any, of the $3,000 John Doe paid for attending a Real Estate conference cruise from Miami to Galveston can he deduct as a business education expense? is better than What are the tax consequences of these facts? The Conclusion(s) should be numbered to correspond to the Issue(s). State a definite conclusion, if possible, for each Issue. If a definite conclusion is not possible, for example, because you are researching alternative ways to plan a transaction, then state the conclusion that will be appropriate IF each alternative is taken. The Analysis/Discussion section should be organized to correspond to each issue if there is more than one. Each numbered subsection in the Analysis section should be organized as follows: o Summarize the relevant Code section. For example, if you are analyzing a deductibility of a business expense, begin by summarizing the rule in §162(a). Parap ...

1. Tax Research Assignment 2
Acct 6140 Students Only
Fall 2013
Your assignment is to write a professional tax research
memorandum that
addresses the issue shown below.
Mike is a salesperson who represents several companies. On
January 2, 2014, he receives by mail a commission check from
Produce Packaging Distributors, Inc. in the amount of $13,500
and
dated December 30, 2013. Mike is concerned about the year in
which the $13,500 is taxable. Although the check is dated 2013,
he
contends that it would have been unreasonable for him to drive
the
55 miles to the Produce Packaging offices on a holiday to
collect the
check. Further, Mike maintains that even if he had made the trip
to
collect the check, by the time he returned home, his bank would
have
closed and he could not have received credit for the check until
after
the first of the year.
In addition, Mike attended classes provided by his church in
2013.
He made payments to the church that were required to attend
classes. He plans to deduct the payments as charitable
contributions
to his church on his 2013 tax return.
a. Mike would like you to determine whether he should include
the
$13,500 commission income on his 2013 or 2014 tax return.

2. b. Mike would also like to know if he can deduct the payments
to his
church as charitable contributions in 2013.
Tax Research Memo Format:
Title your memo either generally, e.g., Research Memorandum
or more
specifically, e.g., name of the client and the specific tax
situation at hand
Address your memo to the client file [include the standard Date,
To, From,
and Re headings]
Organize the body of your memo using the following
subheadings:
o Facts
o Issue(s)
o Conclusion(s)
o Analysis/Discussion
The Facts section should clearly and concisely summarize all
relevant
facts that may affect the tax outcomes. In particular, include
dollar
amounts, dates, and names of all parties to transactions.
The Issues section should include numbered issues if there is
more than
one. Write each issue as a question. Include enough of the facts
to give
context to the question. For example, How much, if any, of the
$3,000
John Doe paid for attending a Real Estate conference cruise
from Miami
to Galveston can he deduct as a business education expense? is
better
than What are the tax consequences of these facts?

3. The Conclusion(s) should be numbered to correspond to the
Issue(s).
State a definite conclusion, if possible, for each Issue. If a
definite
conclusion is not possible, for example, because you are
researching
alternative ways to plan a transaction, then state the conclusion
that will
be appropriate IF each alternative is taken.
The Analysis/Discussion section should be organized to
correspond to
each issue if there is more than one.
Each numbered subsection in the Analysis section should be
organized as
follows:
o Summarize the relevant Code section. For example, if you are
analyzing a deductibility of a business expense, begin by
summarizing the rule in §162(a). Paraphrase, do not copy and
paste either from the Code or from commentary.
o Summarize any other relevant law sources such as regulations,
Revenue Rulings, and judicial opinions, if any. The summary of
the
lawCode and other sourcescan usually be done in a single
paragraph unless the issues are very complicated or there is a
large volume of sources to consider.
o Include a second paragraph in which you Apply the law to the
clients facts or planned transactions. This application should
bridge between the law and your conclusion regarding the issue.
Citations: use correct citation format. Always cite the smallest

4. subdivision
of the Code or regulation that contains the language you are
referring to,
e.g., §1031(c)(1)(B) instead of §1031. DO NOT CITE
COMMENTARY
commentary, such as the prose contents of RIAs Federal Income
Tax
Reporter, is not a primary source of the tax law and thus is not
authoritative. Read and use commentary to aid your
understanding of the
law and as a prelude to investigating primary sources such as
the Code,
regs, rulings, and cases.
Ask questions as needed!
See the Sample Research Memorandum below
Sample Research Memorandum
Date: September 20, 20X2
To: J. Kenneth Alexander client file
From: Jane Smith
Facts: In 20X1, Mr. Alexander entered into an employment
agreement with, W.F. Young, Inc., in which
Alexander would remain Executive Vice President, Treasurer,
and Chief Executive Officer until he reached
the age of seventy (70), on December 13, 20X11. On October
15, 20X5, when Alexander was sixty-four
(64) years old, Young terminated Alexander's employment.
On February 10, 20X6, Alexander filed a civil lawsuit against
Young, in which Alexander alleged breach
contract, breach of an implied pension benefits contract, and
age discrimination.
On May 1, 20X7, Alexander and Young executed a written
settlement agreement, under which Young was
to pay Mr. Alexander $350,000, of which $100,000 was
allocated to the age discrimination claim, and

5. $250,000 to breach of contract. On May 5, 20X7, per the
Settlement Agreement, Young issued two checks
payable to "J. Kenneth Alexander and Ryan & White,
Attorneys for J. Kenneth Alexander," one in the
amount of $100,000 (for the age discrimination claim), and the
other in the amount of $225,395.20 (for the
breach of contracts claims, less taxes withheld).
On his 20X7 Federal income tax return, Alexander deducted
$245,100 from the settlement proceeds
attributable to the breach of contracts claims. This deduction
was explained in an attached statement, which
stated that Alexander paid Ryan & White $258,000 in legal
fees. It also stated that according to Ryan &
White's time allocations, 5% of the Legal Fee was attributable
to settlement of the age discrimination claim,
and 95% to settlement of the breach of contracts claims.
The IRS sent a notice of deficiency disallowing Mr. Alexander's
direct deduction of the Legal Fee from the
settlement proceeds. The IRS determined that the $250,000
received from Young in settlement of the
breach of contracts claims was gross income to Alexander, and
that the Legal Fee associated with those
claims were miscellaneous itemized deductions. Accordingly,
the IRS reduced the $245,100 deduction
reported on the 2007 return to $240,198, due to the increase in
Mr. Alexander's adjusted gross income and
the two percent (2-percent) adjusted gross income limitation for
miscellaneous deductions. In addition, the
IRS determined that, due to these adjustments, Alexander was
liable for the Alternative Minimum Tax
("AMT"), which resulted in a deficiency of $57,441.
Issues:
(1) Whether Mr. Alexander properly deducted the Legal Fee
from the settlement proceeds under Section
1001?
(2) If not, then whether the legal fee is an "above the

6. line" trade or business deduction under Section 162 of
the Code, or is a miscellaneous itemized deduction "below
the line?"
Conclusions:
(1) No, the legal fee should not have been deducted from the
settlement proceeds in determining Mr.
Alexanders income.
(2) The legal fee is a miscellaneous itemized deduction, not a
trade or business deduction.
Discussion:
(1) Characterization of the Legal Fee
Section 61(a), defines gross income as "all income from
whatever source derived." It includes,
"[c]ompensation for services, including fees,
commissions, fringe benefits, and similar items." In
addition,
145
numerous courts have ruled that the classification of amounts
received from litigation, and in settlement of
litigation, is to be determined by the nature and basis of the
action settled. This is referred to as the nature
of the claim test. Raytheon Production Corp. v. IRS, 144 F.2d
110, 32 AFTR 1155 (1st Cir.), cert. denied,
323 U.S. 779 (1944); see Getty v. IRS, 913 F.2d 1486, 66 AFTR
2d 90-5517 (9th Cir. 1990) (applying
Raytheon test in characterizing settlement payment for tax
purposes).
An amount received in lieu of compensation under an
employment contract constitutes gross income to the
recipient in the year in which it was received. See Furrer v. IRS,
566 F.2d at 1117 (holding lump sum
payment for termination of an agency relationship is ordinary
income); Heyn v. IRS, 39 T.C. 719 (1963)
(holding amount received in consideration of an employment

7. contract is ordinary income); cf. Rev. Rul. 80364, 1980-2 C.B.
294 (illustrating by way of three hypothetical examples the
income and employment tax
consequences of interest and attorney's fees awarded in
connection with claims for back wages). See Henry
v. IRS, 62 T.C. 605 (1974) (holding that amounts received in
settlement of breach of employment contract
must be held impressed with the same compensatory, taxable
character).
What is relevant is that Mr. Alexander in substance was suing
for damages suffered by the loss of his
employment with Young -- his loss of compensation in terms of
salary and retirement benefits. The claim
giving rise to the legal fee is inexorably rooted in Mr.
Alexander's employment with Young -- indeed, in his
status as Young's "employee." Because the damages
Mr. Alexander received are essentially a substitute for
the salary and benefits he would have received under the
employment contract, they are fully included as
ordinary income in Mr. Alexander's gross income under Section
61.
(2) Deductibility of the Legal Fee
All increases in wealth must be included in gross income, unless
the taxpayer can demonstrate that the
amount received falls within a specific statutory exclusion. IRS
v. Glenshaw Glass, 348 U.S. 426, 431, 47
AFTR 162, reh'g denied, 349 U.S. 925 (1955). Section 162(a)
provides that there "shall be allowed as a
deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on
any trade or business." Section 62(a)(1) adds that
expenses falling within Section 162(a) are deducted from
gross income to arrive at "adjusted gross income,"
explicitly excluding expenses incurred by a taxpayer
engaged in the trade or business of the performance of services
as an employee.

8. Expenses excluded under the Section 62(a)(1) limitation are
treated as "itemized deductions" under Section
63, such that they are subtracted from adjusted gross income in
computing taxable income. I.R.C. section
63(d). In turn, under Section 67(b) "miscellaneous
itemized deductions" are subject to a 2-percent floor,
such that they are allowable "only to the extent that the
aggregate of such deductions exceeds 2 percent of
adjusted gross income."
A court would likely look to the plain language of Section
62(a)(1), which makes no distinction between
present and former employees if the expenses originated in the
trade or business of being an employee.
Thus, the fact that Mr. Alexander's lawsuit resulted from his
employment at Young determines Alexanders
status as Young's "employee" for purposes of falling
within the Section 62(a)(1) limitation.
Because trade or business expenses subject to Section 62(a)(1),
such as Mr. Alexander's legal fee, are not
among the deductions listed in Section 67(b), statutory
construction leads to the conclusion that they are
miscellaneous itemized deductions subject to the 2-percent
floor. See McKay, 102 T.C. at 493; cf. In Re
Black, 131 B.R. 106, 71A AFTR 2d 93-4510 (E.D. Ark. 1991)
(discussing the deductibility of nonreimbursed employee
business expenses).
Thus, I conclude that the legal fee is properly deducted
"below the line."
[Note: based on Alexander v. IRS, 77 AFTR2d 96-301 (CA1
1995)]
Tax Research Assignment 2
Acct 6140 Students Only
Fall 2013
Your assignment is to write a professional tax research

9. memorandum that addresses the issue shown below.
Mike is a salesperson who represents several companies. On
January 2, 2014, he receives by mail a commission check from
Produce Packaging Distributors, Inc. in the amount of $13,500
and dated December 30, 2013. Mike is concerned about the
year in which the $13,500 is taxable. Although the check is
dated 2013, he contends that it would have been unreasonable
for him to drive the 55 miles to the Produce Packaging offices
on a holiday to collect the check. Further, Mike maintains that
even if he had made the trip to collect the check, by the time he
returned home, his bank would have closed and he could not
have received credit for the check until after the first of the
year.
In addition, Mike attended classes provided by his church in
2013. He made payments to the church that were required to
attend classes. He plans to deduct the payments as charitable
contributions to his church on his 2013 tax return.
a. Mike would like you to determine whether he should include
the $13,500 commission income on his 2013 or 2014 tax return.
b. Mike would also like to know if he can deduct the payments
to his church as charitable contributions in 2013.
Tax Research Memo Format:
· Title your memo either generally, e.g., “Research
Memorandum” or more specifically, e.g., “name of the client
and the specific tax situation at hand”
· Address your memo to the client file [include the standard
Date, To, From, and Re headings]
· Organize the body of your memo using the following
subheadings:
· Facts
· Issue(s)
· Conclusion(s)

10. · Analysis/Discussion
· The Facts section should clearly and concisely summarize all
relevant facts that may affect the tax outcomes. In particular,
include dollar amounts, dates, and names of all parties to
transactions.
· The Issues section should include numbered issues if there is
more than one. Write each issue as a question. Include enough
of the facts to give context to the question. For example, “How
much, if any, of the $3,000 John Doe paid for attending a Real
Estate conference cruise from Miami to Galveston can he deduct
as a business education expense?” is better than “What are the
tax consequences of these facts?”
· The Conclusion(s) should be numbered to correspond to the
Issue(s). State a definite conclusion, if possible, for each Issue.
If a definite conclusion is not possible, for example, because
you are researching alternative ways to plan a transaction, then
state the conclusion that will be appropriate IF each alternative
is taken.
· The Analysis/Discussion section should be organized to
correspond to each issue if there is more than one.
Each numbered subsection in the Analysis section should be
organized as follows:
· Summarize the relevant Code section. For example, if you are
analyzing a deductibility of a business expense, begin by
summarizing the rule in §162(a). Paraphrase, do not copy and
paste either from the Code or from commentary.
· Summarize any other relevant law sources such as regulations,
Revenue Rulings, and judicial opinions, if any. The summary
of the law—Code and other sources—can usually be done in a
single paragraph unless the issues are very complicated or there
is a large volume of sources to consider.
· Include a second paragraph in which you Apply the law to the
client’s facts or planned transactions. This application should
bridge between the law and your conclusion regarding the issue.
· Citations: use correct citation format. Always cite the

11. smallest subdivision of the Code or regulation that contains the
language you are referring to, e.g., §1031(c)(1)(B) instead of
§1031. DO NOT CITE COMMENTARY—commentary, such as
the prose contents of RIA’s Federal Income Tax Reporter, is not
a primary source of the tax law and thus is not authoritative.
Read and use commentary to aid your understanding of the law
and as a prelude to investigating primary sources such as the
Code, regs, rulings, and cases.
· Ask questions as needed!
· See the Sample Research Memorandum below
Sample Research Memorandum
Date: September 20, 20X2
To: J. Kenneth Alexander client file
From: Jane Smith
Facts: In 20X1, Mr. Alexander entered into an employment
agreement with, W.F. Young, Inc., in which Alexander would
remain Executive Vice President, Treasurer, and Chief
Executive Officer until he reached the age of seventy (70), on
December 13, 20X11. On October 15, 20X5, when Alexander
was sixty-four (64) years old, Young terminated Alexander's
employment.
On February 10, 20X6, Alexander filed a civil lawsuit against
Young, in which Alexander alleged breach contract, breach of
an implied pension benefits contract, and age discrimination.
On May 1, 20X7, Alexander and Young executed a written
settlement agreement, under which Young was to pay Mr.
Alexander $350,000, of which $100,000 was allocated to the
age discrimination claim, and $250,000 to breach of contract.
On May 5, 20X7, per the Settlement Agreement, Young issued
two checks payable to "J. Kenneth Alexander and Ryan &

12. White, Attorneys for J. Kenneth Alexander," one in the amount
of $100,000 (for the age discrimination claim), and the other in
the amount of $225,395.20 (for the breach of contracts claims,
less taxes withheld).
On his 20X7 Federal income tax return, Alexander deducted
$245,100 from the settlement proceeds attributable to the breach
of contracts claims. This deduction was explained in an attached
statement, which stated that Alexander paid Ryan & White
$258,000 in legal fees. It also stated that according to Ryan &
White's time allocations, 5% of the Legal Fee was attributable
to settlement of the age discrimination claim, and 95% to
settlement of the breach of contracts claims.
The IRS sent a notice of deficiency disallowing Mr. Alexander's
direct deduction of the Legal Fee from the settlement proceeds.
The IRS determined that the $250,000 received from Young in
settlement of the breach of contracts claims was gross income to
Alexander, and that the Legal Fee associated with those claims
were miscellaneous itemized deductions. Accordingly, the IRS
reduced the $245,100 deduction reported on the 2007 return to
$240,198, due to the increase in Mr. Alexander's adjusted gross
income and the two percent (2-percent) adjusted gross income
limitation for miscellaneous deductions. In addition, the IRS
determined that, due to these adjustments, Alexander was liable
for the Alternative Minimum Tax ("AMT"), which resulted in a
deficiency of $57,441.
Issues:
(1) Whether Mr. Alexander properly deducted the Legal Fee
from the settlement proceeds under Section 1001?
(2) If not, then whether the legal fee is an "above the line" trade
or business deduction under Section 162 of the Code, or is a
miscellaneous itemized deduction "below the line?"
Conclusions:

13. (1) No, the legal fee should not have been deducted from the
settlement proceeds in determining Mr. Alexander’s income.
(2) The legal fee is a miscellaneous itemized deduction, not a
trade or business deduction.
Discussion:
(1) Characterization of the Legal Fee
Section 61(a), defines gross income as "all income from
whatever source derived." It includes, "[c]ompensation for
services, including fees, commissions, fringe benefits, and
similar items." In addition, 145
numerous courts have ruled that the classification of amounts
received from litigation, and in settlement of litigation, is to be
determined by the nature and basis of the action settled. This is
referred to as “the nature of the claim” test. Raytheon
Production Corp. v. IRS, 144 F.2d 110, 32 AFTR 1155 (1st
Cir.), cert. denied, 323 U.S. 779 (1944); see Getty v. IRS, 913
F.2d 1486, 66 AFTR 2d 90-5517 (9th Cir. 1990) (applying
Raytheon test in characterizing settlement payment for tax
purposes).
An amount received in lieu of compensation under an
employment contract constitutes gross income to the recipient
in the year in which it was received. See Furrer v. IRS, 566 F.2d
at 1117 (holding lump sum payment for termination of an
agency relationship is ordinary income); Heyn v. IRS, 39 T.C.
719 (1963) (holding amount received in consideration of an
employment contract is ordinary income); cf. Rev. Rul. 80-364,
1980-2 C.B. 294 (illustrating by way of three hypothetical
examples the income and employment tax consequences of
interest and attorney's fees awarded in connection with claims
for back wages). See Henry v. IRS, 62 T.C. 605 (1974) (holding
that amounts received in settlement of breach of employment
contract must be held impressed with the same compensatory,
taxable character).

14. What is relevant is that Mr. Alexander in substance was suing
for damages suffered by the loss of his employment with Young
-- his loss of compensation in terms of salary and retirement
benefits. The claim giving rise to the legal fee is inexorably
rooted in Mr. Alexander's employment with Young -- indeed, in
his status as Young's "employee." Because the damages Mr.
Alexander received are essentially a substitute for the salary
and benefits he would have received under the employment
contract, they are fully included as ordinary income in Mr.
Alexander's gross income under Section 61.
(2) Deductibility of the Legal Fee
All increases in wealth must be included in gross income, unless
the taxpayer can demonstrate that the amount received falls
within a specific statutory exclusion. IRS v. Glenshaw Glass,
348 U.S. 426, 431, 47 AFTR 162, reh'g denied, 349 U.S. 925
(1955). Section 162(a) provides that there "shall be allowed as a
deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business." Section 62(a)(1) adds that expenses falling within
Section 162(a) are deducted from gross income to arrive at
"adjusted gross income," explicitly excluding expenses incurred
by a taxpayer engaged in the trade or business of the
performance of services as an employee.
Expenses excluded under the Section 62(a)(1) limitation are
treated as "itemized deductions" under Section 63, such that
they are subtracted from adjusted gross income in computing
taxable income. I.R.C. section 63(d). In turn, under Section
67(b) "miscellaneous itemized deductions" are subject to a 2-
percent floor, such that they are allowable "only to the extent
that the aggregate of such deductions exceeds 2 percent of
adjusted gross income."
A court would likely look to the plain language of Section
62(a)(1), which makes no distinction between present and
former employees if the expenses originated in the trade or
business of being an employee. Thus, the fact that Mr.

15. Alexander's lawsuit resulted from his employment at Young
determines Alexander’s status as Young's "employee" for
purposes of falling within the Section 62(a)(1) limitation.
Because trade or business expenses subject to Section 62(a)(1),
such as Mr. Alexander's legal fee, are not among the deductions
listed in Section 67(b), statutory construction leads to the
conclusion that they are miscellaneous itemized deductions
subject to the 2-percent floor. See McKay, 102 T.C. at 493; cf.
In Re Black, 131 B.R. 106, 71A AFTR 2d 93-4510 (E.D. Ark.
1991) (discussing the deductibility of non-reimbursed employee
business expenses).
Thus, I conclude that the legal fee is properly deducted "below
the line."
[Note: based on Alexander v. IRS, 77 AFTR2d 96-301 (CA1
1995)]