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Tax File Memorandum

The assignment below will assess your ability to perform tax research and prepare an effective Tax Memo for complex tax problems..

You will use CCH IntelliConnect (aka CCH Omnitax or AnswerConnect) exclusively for your tax research for this course (access provided through the Library).

Using the tax research process detailed in Chapter 4 and Chapter 10 and the Tax File Memorandum Template, develop a separate tax file memorandum for each of the Research Cases below. All submissions should follow the file memo format exactly (a client letter is not needed unless specifically required). Include your three completed memos in one file for submission.

RESEARCH CASE 1

During the year, LittleBear, Inc. paid the Environmental Protection Agency (EPA) $750,000 related to the clean-up of a contaminated stream near the company’s largest manufacturing plant. The contamination was the result of a leaky pipe at the plant. The EPA repaired the pipe and cleaned up the surrounding area and stream. Initially, the EPA fined the company $1,125,000 ($25,000 per day for 45 days) for noncompliance with regulations. LittleBear ultimately settled the assessment for $750,000. During settlement discussions, the EPA disclosed that actual clean-up costs incurred were $450,000.

Write a memo to the files explaining the proper tax treatment of the payment, including in which tax year the deduction can be taken.

RESEARCH CASE 2

The Laffell’s oldest son, Chase, started college as an incoming freshman in August of 2019. Mr. and Mrs. Lafell started a 529 plan for Chase when he was very young. When Chase started college, his parents pulled $9,200 out of his 529 plan. $6,000 was paid to the college for tuition, fees, and books. $1,200 was used to purchase Chase a new laptop, and $2,000 went towards Chase’s rent at his off-campus apartment. The Lafell’s will claim Chase as a dependent on their 2019 return. They were told that Chase’s tuition may be eligible for the American Opportunity Credit.

Write a memo to the files explaining the proper tax treatment of the distribution from the 529 plan, what expenses (if any) are eligible for education tax credit, and the relationship between the qualified education expenses allowed under each.

RESEARCH CASE 3

Rhakima is a 51-year old, divorced female living in Oklahoma. She purchased her primary residence 19 years ago for $200,000 and has lived there ever since. She made payments on her mortgage during that time and reduced her mortgage balance to $60,000. Last year (2020), Rhakima took out a home equity loan of $100,000. She used $75,000 to have a 3rd bedroom built on as an addition to her residence. She used the other $25,000 to pay off some credit card debt she had accumulated.

Write a memo to the files explaining the proper tax treatment of the interest on the first mortgage and the interest on the home equity line of credit, assuming Rhakima itemizes deductions on Schedule A.