Example of a Tax Research Memo

The tax research memo on this web site illustrates one way in which tax research can be documented and communicated. Before reviewing this memo, study the lesson for writing a research memo, read the fact scenario we provide, complete the research, and write a research memo following the lesson guidelines.

Albert B. Smith, a staff accountant, prepared this memo on October 23, 2003. The endnotes provide information that will help you to think about what Albert wrote and why. These endnotes would not appear in a real tax research memo.

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TO: File
FROM:
Albert Smith

RE:
Fly Jones (tax year 2003)

 

Facts

   
     

Fly Jones, a U.S. citizen and our client, plays point guard for
a professional basketball team, the Wyoming Wildcats. To
discourage laziness and mental errors, Fly and his teammates
formed the Slammin-Jammin Club on August 30, 2002.
Membership in the club was voluntary, but every Wildcat
desired to join and did so.

   
     

Each time someone on the opposing team blocked a shot
during a regular season game, the Wildcat who was
“slammed and jammed” paid a $100 fine to the club. When a
Wildcat was responsible for a turnover (e.g., having the ball
stolen), he paid a $50 fine. Good performance (e.g., blocking
the shot of or stealing the ball from an opposing player) did not reduce fines otherwise payable. At the end of the season, the club had collected approximately $40,000.

   
     

According to club rules determined at the season’s beginning,
one-tenth of the fines was used to fund a barbecue for the
players and their families on March 15, 2003. (Fly did not
attend the barbecue because his grandmother’s funeral was
the same day.) The rest of the funds, again according to
previously-determined club rules, was given to the American
Red Cross. The Red Cross knew nothing about the
contribution until it was actually donated on May 12, 2003.
One month later, the American Red Cross sent individual
letters of thanks and receipts to each member of the club.
The donation amount on each receipt was based on a report
the club’s treasurer prepared.

   
     

Of the $40,000, Fly contributed $2,200 to the Slammin-
Jammin Club in 2002 and $2,800 in 2003. Fly itemizes his
deductions. He files jointly, and his adjusted gross income is
about $117,000.

   
     
     

Issue and Conclusion 1

   
     

Is Fly entitled to a deduction for fines he paid to the Slammin-
Jammin Club?1

   
     

Yes, Fly can deduct some of his fines as charitable
contributions.2

   
     
     

Analysis 1

   
     

The fines paid to the Slammin-Jammin Club are not
deductible as business expenses since, under §162(a), they
are not ordinary and necessary.3 To be ordinary, Welch v.
Helvering
(S.Ct., 1933)4 requires that the fines be
commonplace among other taxpayers who find themselves in
comparable situations.5 Forming a club to which members
pay fines for mental errors and laxity is not commonplace
among professional basketball players.6 To be necessary, the
players must reasonably expect the fines to be appropriate
and helpful according to Welch.7 Whether the pressure of
fines can reasonably be expected to increase performance is
debatable. But since the payment is not ordinary, Fly cannot
deduct his fines under §162.8

 

B-1


B-42





B-42

 


 
A-1

ABS
10/23/03


Fly Jones , 2003

   

However, Fly can deduct some portion of his fines as a
charitable donation if in the nature of a contribution or gift
under §170(c).9 CIR v. Duberstein (S.Ct., 1960)10 clarifies the
meaning of the term “gift.” In this decision, the taxpayer
periodically gave names of potential customers to a business
associate. The associate was so appreciative that he gave the
taxpayer a Cadillac. The taxpayer protested that he had not
intended to be compensated. But the associate persisted, and
the taxpayer relented.11 In holding that the Cadillac was
gross income to the taxpayer, the court observed that a
donor’s intent to make a gift is the key factor establishing a
transfer as a gift.12 Similarly, Fly intended to make a gift of
his contributions to the club. Fly voluntarily joined the club
and was aware from the beginning that the bulk of fines
would be paid to the American Red Cross.13 Thus, Fly’s
contributions were in the nature of gifts.

 



B-11

 

 




B-36

     

Fly can deduct some portion of his fines even though paid
through the Slammin-Jammin Club. In Rev. Rul. 55-192,14
the members of a social club deducted a portion of their
membership dues that were distributed to a qualified charity
later. Thus, to claim deductions, individuals are not
necessarily required to donate money or property directly to
qualified charitable organizations.15 Fly can deduct the
contributions he made to the American Red Cross through
the Slammin-Jammin Club.16

 

 



B-57

     
     

Issue and Conclusion 2

   
     

What portion of Fly’s $5,000 fines can he deduct as a
charitable contribution?17

   
     

Fly can deduct $4,500 (90% of his $5,000 fines) as a
charitable contribution.18

   
     
     

Analysis 2

   
     

To determine the deduction for each individual, the total
$40,000 contribution must be allocated among the players.19
The taxpayer in Wilson v. CIR (TCM, 1952)20 attempted to
deduct charitable contributions that his mother, the taxpayer’s
dependent, made. Even though the taxpayer gave the
contributed funds to his mother prior to their donation to
charity, the court held that a deduction is available only to the
individual making the donation.21 In the same way, the
charitable contribution the Slammin-Jammin Club made must
be allocated only among the individuals paying the fines. Each
individual’s contribution is limited to his actual fines. Wilson22
suggests that a proportional allocation method must be used
to determine the charitable contribution of each club
member.23 In contrast to the taxpayer’s mother in Wilson,
the club is not a separate taxable person or entity and, thus,
can be ignored as a type of conduit. In other words, the
individual club members are the actual donors (requiring
some allocation method), not the club.24 Based on the
treasurer’s report, Fly’s allocable portion of fines paid is
$5,000.25

 

 

 




B-46

   

 
A-2

ABS
10/23/03


Fly Jones , 2003


Fly cannot deduct the portion of fines paid for which he
receives tangible benefits.26 Rev. Rul. 76-23227 involved
amounts donated to a tax-exempt organization that
conducted weekend marriage seminars. The ruling allows a
deduction only to the extent the amount donated exceeds the
value of benefits and privileges received in return (i.e., free or
discounted seminar attendance).28 Fly donated $5,000 but
received benefits in return valued at $500 (i.e., the
barbecue). Thus, his deductible contribution is only $4,500.

Nonattendance at the barbecue does not affect the
deduction.29 Rev. Rul. 67-246,30 dealt with admission fees
to charitable fund raisers such as balls, fairs, bazaars,
banquets, and athletic events. The ruling allowed the taxpayer
to deduct only the excess of donations over the value of
benefits received in return. The ruling stated that the
deduction is not increased when the taxpayer decides not to
accept the available benefits (e.g., through non-
attendance).31 The fact that Fly did not attend the barbecue
has no effect on (i.e., does not increase) his charitable
deduction. Since only 90% of the fines collected is
contributed to the American Red Cross, the amount
attributable to the barbecue reduces Fly’s deduction. Thus,
10% of Fly’s contribution to the club or $500 is a
nondeductible personal expense. The remaining $4,500 is
deductible as a charitable contribution. 32

 

 





B-49

 

 

 





B-51

   


Issue and Conclusion 3

   
     

When can Fly deduct his $4,500 charitable contribution to
the American Red Cross?33

   
     

Fly can deduct his $4,500 contribution in 2003, the year
the funds are given to the American Red Cross.34

   
     
     

Analysis 3

   
     

Under §170(a)(1), contributions individuals make are
deductible in the year paid. Reg. §1.170A-1(b) states that a
contribution is ordinarily considered paid at the time delivery
occurs. However, the regulation does not address to whom
the delivery must be made.35

 


B-9


B-22

     

 
A-3

ABS
10/23/03


Fly Jones, 2003

In Rev. Rul. 55-192,36 70% of
membership dues paid to a
social club were earmarked for designated charities.
Members paid dues to the club’s treasurer, whom the
charities previously authorized to act as their collecting agent.
Members could deduct 70% of their contributions during the
taxable year in which they paid their dues. However, if the
charities had not authorized the treasurer to act as collecting
agent, members could not deduct their contributions until the
taxable year in which the treasurer forwarded such funds to
the charities.37 Thus, the taxable year in which Fly can
deduct his $4,500 depends on whether the club has a duly-
authorized collecting agent, the year when “fines” are paid,
and the year when 90% of the fines are transferred to the
American Red Cross.
38

 

 

 






B-57

The Slammin-Jammin Club is not an authorized agent of the
American Red Cross since the latter did not know of the
contribution until it was actually received. Thus, payments
made to the club are deductible in the year the club transfers
the payment to the American Red Cross. Though Fly paid
some of his fines in 2002 and some in 2003, his $4,500
deduction falls entirely in 2003.39

 

   

 
A-4

ABS
10/23/03


  1. Issues in research memos should be written in the context of the client’s facts. For example, the taxpayer’s name is used in the issue. In contrast, the issue in a judicial brief should be written in more general terms.
  2. A one-sentence conclusion should immediately follow each issue. Research memos are easier to understand and follow when the reviewer knows the conclusion before reading the analysis.
  3. Often, a good strategy is to begin an issue’s analysis with the relevant Code section.
  4. When the case is attached, the only relevant information is the court and year. The traditional cite, consisting of the volume, reporter series, and page number, is unnecessary information that clutters the research memo.
  5. This statement is the rule of law. At times, providing only a judicial decision’s rule of law is sufficient, especially for well-known landmark cases with broadly-applicable holdings. In contrast, other judicial decisions cited in this research memo are briefly discussed to establish their relevance to the client’s facts. Generally, you should discuss each judicial decision or ruling briefly to show its relevance; the example here is an exception to this usual procedure.
  6. This sentence applies the Welch v. Helvering’s rule of law to the client’s facts. An explicit application of law to facts is very important in a research memo.
  7. Subsequent references to a judicial decision within the same issue need only include a summary reference consisting of the taxpayer’s name.
  8. The §162 possibility is addressed first since, if allowed, the deduction would be for adjusted gross income (AGI). Deduction for AGI is a more favorable outcome for many taxpayers than an itemized deduction, which the next paragraph addresses.
  9. Often, a good strategy is to begin an issue’s analysis with the relevant Code section.
  10. When the case is attached, the only relevant information is the court and year. The traditional cite, consisting of the volume, reporter series, and page number, is unnecessary information that clutters the research memo.
  11. Sufficient facts are provided about Duberstein to establish the decision’s relevance to the client’s facts. Establishing that the fact pattern in the judicial decision is analogous to the client’s facts is very important in a research memo. The same is true of IRS rulings.
  12. The rule of law follows the brief discussion of the judicial decision’s facts.
  13. The explicit application of the law to the client’s facts is very important.
  14. When the ruling is attached, the only relevant information is the ruling’s year and number. The traditional cite, which includes the volume, reference to the Cumulative Bulletin, and page number, provides unnecessary information that clutters the research memo.
  15. Sufficient facts are provided about Rev. Rul. 55-192 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.
  16. The explicit application of the law to the client’s facts is very important.
  17. Issues in research memos should be written in the context of the client’s facts. For example, the dollar amount of the fines is used in the issue. Note that issues 1 and 2 could be combined as follows: “How much can Fly deduct for the $5,000 fines he paid to the Slammin-Jammin Club?” Combining the two issues might be appropriate when the analysis of each is very short or involves substantial overlap.
  18. A one-sentence conclusion should immediately follow each issue. Research memos are easier to understand and follow when the reviewer knows the conclusion before reading the analysis.
  19. Sometimes an issue requires that several subpoints be addressed (e.g., that total contributions must be allocated). In this situation, a short conclusion at the beginning of each subpoint is an organization strategy that can increase readability.
  20. When the case is attached, the only relevant information is the court and year. The traditional cite, consisting of the volume, reporter series, and page number, is unnecessary information that clutters the research memo.
  21. Sufficient facts are provided about Wilson to establish the decision’s relevance to the client’s facts. Establishing that the fact pattern in the judicial decision is analogous to the client’s facts is very important in a research memo. The same is true of IRS rulings.
  22. Subsequent references to a judicial decision within the same issue need only include a summary reference consisting of the taxpayer’s name.
  23. The explicit application of the law to the client’s facts is very important. As a Tax Court memorandum decision, other sources (besides and perhaps better than Wilson) could have been cited to establish the general principle that only the payor of an expense or donation is entitled to a deduction. The mere fact that Wilson involved a charitable contribution, like our client’s, does not necessarily mean that it is the best source to cite for such a general principle.
  24. These two sentences simply clarify a difference between Wilson and our client’s facts that is irrelevant.
  25. The explicit application of the law to the client’s facts is very important.
  26. Sometimes an issue requires that several subpoints be addressed (e.g., no deduction for benefits received). In this situation, a short conclusion at the beginning of each subpoint is an organization strategy that can increase readability.
  27. When the ruling is attached, the only relevant information is the ruling’s year and number. The traditional cite, which includes the volume, reference to the Cumulative Bulletin, and page number, provides unnecessary information that clutters the research memo.
  28. Sufficient facts are provided about Rev. Rul. 76-232 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.
  29. Sometimes an issue requires that several subpoints be addressed (e.g., nonattendance is irrelevant). In this situation, a short conclusion at the beginning of each subpoint is an organization strategy that can increase readability.
  30. When the ruling is attached, the only relevant information is the ruling’s year and number. The traditional cite, which includes the volume, reference to the Cumulative Bulletin, and page number, provides unnecessary information that clutters the research memo.
  31. Sufficient facts are provided about Rev. Rul. 55-192 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.
  32. The explicit application of the law to the client’s facts is very important. The tax law often does not provide explicit allocation rules for every conceivable situation. Taxpayers often allocate items on the basis of common sense or sound logic. In other words, citing primary authority is not always necessary for allocation issues.
  33. Issues in research memos should be written in the context of the client’s facts. For example, the dollar amount of the contribution (as established in issue 2), the client’s name, and the donee’s name are used in this issue.
  34. A one-sentence conclusion should immediately follow each issue. Research memos are easier to understand and follow when the reviewer knows the conclusion before reading the analysis.
  35. Often, a good strategy is to begin an issue’s analysis with the relevant Code section. If a regulation adds further insight, discuss its contribution next. In this issue, the regulation provides some clarification but is insufficient to resolve the issue and reach a conclusion.
  36. When the ruling is attached, the only relevant information is the ruling’s year and number. The traditional cite, which includes the volume, reference to the Cumulative Bulletin, and page number, provides unnecessary information that clutters the research memo.
  37. Sufficient facts are provided about Rev. Rul. 55-192 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.
  38. Sometimes a statement summarizing the relevant factors, such as this one, is helpful before applying the law to the client’s facts. The more complex the law, the more likely a summary statement will be helpful.
  39. The explicit application of the law to the client’s facts is very important.