P3–File Memo

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Assignment P3
Statutory Authority: Internal Revenue Code
Introductory File Memorandum
Assignment P3 is a writing assignment rather than a quiz. A copy of a file memo must be submitted through
the Assignment tool in Canvas as explained below.
In doing tax research, your search for a solution may begin and end with the Code. Consequently, it is imperative
to read the Code carefully. The purpose of this exercise is to familiarize you with the Code. For this reason, you
are to use only the Code in answering the problem!!!!!!!! Do not research or cite
regulations, etc., for this assignment.
 Note: The CPA exam will require you to find a rule in the Code and apply it to solve a problem.
In reading the Code, watch for:
• Special phrases that are defined elsewhere in the same Code Section or another Code Section
• Cross references between Code Sections
• The use of the words “and” and “or”
• Dollar limitations (floors and ceilings) that are relevant to the client’s answers/facts
This assignment includes an e-mail from Mel Smith to your accounting firm. You have been assigned to
research the problem. If you have additional questions, you may contact Mel by e-mailing the instructor at
sehaines@iupui.edu. Hint: you will have questions. You must address Mel’s situation by writing a memo to
the file (i.e., a file memo). Your memo will arrive at a conclusion concerning Mel’s tax problem. Remember to
address the questions to Mel, not to the instructor.
You may work in pairs (2 people). If you work in pairs, only one paper (rather than separate papers)
should be submitted with the names of both group members. Undergrad with undergrad; Graduate
with graduate only.
In writing the memo, use the format found in the document Communicating Tax Research that is posted in
Canvas under Modules. Sample memos also are posted. One deals with an issue that can be answered using
only the Code. It is a good example of what you should do for this assignment.
For this assignment, answer the question using only the Internal Revenue Code. While you normally would
utilize the regulations, revenue rulings, court cases and the like in completing tax research, you should use
only the Code for this particular assignment. You may need additional information from your client but you
should address the problem using only the Code.
You may use RIA to identify the appropriate Code section(s) but you are not to look at explanations of the
Code, the regulations, cases, etc.
Do not simply answer yes or no to your client’s question. Answer as if you were writing a memo to the file,
including your specific authority (i.e., cite the relevant Code sections). The memo should be about one typed
page, single-spaced, with one-inch margins.
Before you write, you may need some basic tax information. Refer to the introductory tax text regarding
information on the deduction of interest. After you have a sense of the problem, find the relevant Code
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Section(s) that deal with these issues and write the memo. You might want to search the Code for relevant
terms. Remember, sometimes tax research begins and ends with the Code. This is one such instance.
For this assignment, your fact-finding and the organization of your answer, as well as your grammar, spelling,
punctuation, etc., will be considered in determining your grade. A technically correct answer that is not
communicated professionally will not receive an A grade. (See the Communicating Tax Research as well at
the Common Errors in Tax Research readings posted in Canvas.)
I recommend you review the chapter on Interest from your textbook.
Refer to the syllabus for the due date. Submit the assignment through the Assignments tool in Canvas by
10:00pm on the due date. Please submit as a Word document. The graded document will be returned to the
P3 Assignment.
The beginning of each memo should follow the following format.
******************************************************************************************
File Memorandum Format
******************************************************************************************
Date:
To: File
From: Student’s name (course number)
Re: Treatment of interest expense
Facts
Issue
Analysis
Conclusion
******************************************************************************************
E-mail from Mel
******************************************************************************************
Hi there,
An instructor at the Kelley School indicated that you may be able to help me. My name is Mel Smith and I live
in Indianapolis. I have twin daughters who are starting college next fall at Northwestern University in Chicago.
The original plan was for the girls to live in the dorm. However, the amount the university charges for what
they would get is unbelievably high. I just don’t want to pay rent for four years (or more). I’m considering
buying a condominium close to Northwestern and having them live there instead of the dorm. I think it would
be a good investment and clearly much better than paying rent. I have identified a condo selling for $300,000
that would be terrific. When the girls leave Chicago, I will probably sell the condo. I would need to borrow
$240,000 to buy it, and what I want to know is whether I can deduct the interest expense on the loan. If you have
questions or need additional information, please contact me, Mel, by messaging the research course instructor at
her IUPUI email address.
Thanks,
Mel
P.S. Please understand that I try and check my messages as often as possible, but I am not always
available.
COMMON ERRORS IN TAX RESEARCH
Mistakes You Do Not Want to
Make
In reading a couple of million tax research papers, one finds there is no perfect approach to
either the research or the write-up. Below are some common mistakes in both the research
technique and the write-up. First of all, remember that there is no perfect approach.
Attorneys may take one approach while accountants might take another. In any event, the
following list provides some idea of the mistakes that you should try and avoid. It is by no
means complete nor are the items mentioned in any order of importance.
1. Identify the facts and state them up front. This statement of what the client has told
you regarding his or her situation provides the basis of your research. It tells what your
conclusions are based on. And, three years down the road when the client’s return is
audited and he says, “Well, I told you that,” you can point out exactly what facts he did
and did not convey. In your paper, the first section should simply be “FACTS.” A recent
paper began
In today’s complex world, the tax laws and regulations are highly technical and ever changing.
Individuals skilled in the knowledge of tax concepts are rewarded generously. One of the main
objectives why taxpayers seek professional consultations is for help on reducing their tax liability.
There are many ways for a taxpayer to reduce their tax liability.
While this opening statement might be suitable for a term paper on tax research for an
English course, it is not an appropriate start for a tax research memorandum that will be
read by your supervisor who has been practicing for several years. Remember your
audience.
2. Determine the issue and state it up front. This may require reading some background
material that provides you the necessary framework to understand the problem. A basic
text book is often a good starting point. In addition, the tax services provide some
background and their own editorial interpretations. However, do not cite secondary
resources in the file memo!
3. In beginning your research, start with the Internal Revenue Code rather than cases
or Regulations. State what the statute says about the issue. All answers to research
questions should be framed initially in terms of a Code section because the Code is the
ultimate authority. It is the bible!
4. Consider the Regulations after the Code. The authors of the Regulations tried to
anticipate problems that might arise in interpreting the basic statute. For an example,
consider the 150-hour requirement that must be met to sit for the CPA exam. The law
may say you must have an accounting concentration in order to take the CPA exam but
not give you any idea of what an accounting concentration is. The Regulations may in
fact say that it consists of 24 hours of accounting. Therefore, the Regulations often, but
not always, provide sufficient guidance regarding how the statute should be applied in a
particular situation.
5. Citing the Regulations. When citing the regulations, make sure to observe whether the
regulations are in final, temporary or proposed form. It is assumed they are in final form
unless it is stated that they are proposed or temporary. Imitate the text when citing a
regulation (e.g., Reg. Sec. 1.162-1(a)). Do not use the form shown in the tax services
or in court cases.
6. IRS Publications, Instructions to Forms, etc.
The rules found in these sources
normally derive from the regulations, previous rulings, or court cases to which the IRS
has acquiesced. When possible try and cite the original primary authority rather than the
instructions or publications. Your work is more authoritative when you cite the
regulations rather than an IRS publication. You may NOT cite IRS publications as your
source for papers written in this course. If you find an answer in a publication, you
must follow it up by finding and citing the regulation, ruling, or case that the writer of
the publication used as his or her source. Do not cite the publication!
7. Read the cases and rulings. The summaries of the cases and rulings provided by the tax
services give you an idea of whether they relate to your problem. To determine whether
they are truly on point and apply, you must read the full ruling or case. Cases typically
summarize all the history to date on a particular issue, and, therefore, provide tremendous
insight. You must read the cases in their entirety: the whole thing, yes, all of the
case. Reading the entire case will give you a sense of how your write-up should read.
Remember you are just a judge without a black robe! Read the footnotes as well. The
footnotes may give you important information.
8. In cases heard by the Tax Court, the petitioner is the taxpayer (because he or she
petitioned the Tax Court for it to hear his or her case) and the respondent is the IRS or
government. While the court may talk in these terms, you should use the terms
“taxpayer” and “the IRS” or “the government.” Don’t lose points over this error.
9. When reading a case, think of it as simply the story, the saga, of some poor taxpayer,
because that is indeed what it is. Reading a case is not like reading some Harlequin
romance novel, but it helps to imagine the situation of the taxpayer.
10. Always check current developments. Ensure that your research reflects the most recent
developments. The tax law changes daily. Hours of research may be overturned by one
recent case or development. Check to see if any court case on which you are relying was
appealed and, if so, whether the lower court’s decision was affirmed or reversed. With
the advent of Internet-based tax services, all of the information is generally updated
quickly. Note: A legislative change to a code provision may make a regulation issued
under prior law inapplicable to a later event, even if the Treasury Department has not
formally withdrawn the regulation. The tax services generally include a warning at the
top of the regulation. Further research then is required.
11. Provide sufficient facts when discussing important cases. In your write-up, you
normally are trying to develop a point based on some decision written by some judge.
Often it is difficult to appreciate the point you are trying to make without sufficient
information about the facts of the case. Tell a story. Failing to adequately discuss the
facts and provide the necessary background is like giving the punch line without the rest
of the joke!
12. Analyze, analyze, analyze in a logical and deductive manner. Focus on why the result
should be this way or that. Organize your thoughts. A chronological development of the
law and how it applies to your set of facts is normally the best approach. Normally it
doesn’t make sense to discuss a 1989 case first, then a 1970 case, and then jump back to
a 1990 case. Develop your thoughts in a logical manner.
13. State WHY the Court held as it did. Do not argue totally by analogy. It is generally
insufficient to simply say that your case is like Jones and, therefore, the result should be
this or that. Focus on the rationale used by the courts (i.e., judge) in a particular decision
and determine whether it applies in the situation that you are considering. Notice the
writing style, the approach used by the judges in writing up their decisions. Yours should
follow a similar pattern. Pretend you’re a judge and must communicate your findings to
the parties.
14. If you copy and paste a citation from in internet source, remove the hyperlinks.
15. State your answer in such a way that the criteria may be applied to other cases and so
that you can analyze it. What is the test?
16. Avoid one-sentence paragraphs. The first sentence should state the thought that the
paragraph will develop. The following sentences should expand that first statement by
explaining it, illustrating it or proving it.
17. Poor citations and poor form for citations. Cite a case, ruling, procedure and other
authoritative materials in the proper form. Do not cite RIA explanations because they
are not authority. A recent paper contained the following sentence relating to Section
280A concerning the home office deduction:
Paragraph 280A.156 of Sec. 280A concerns….
Wrong, wrong, wrong. There is no such paragraph in Section 280A of the Internal
Revenue Code. This is a reference to where the discussion appears in one of the tax
services. It would have been sufficient to simply say “Sec. 280A.”
Give the complete citation of cases, rulings, etc. Why? So you or your reader can find
them later. The proper citation form for each type of official pronouncement is given in
Chapter 2 of the text. Note the footnotes in your text. These footnotes are examples of
how the citations in your paper should appear. For example, here is a District Court case
with three cites
Cam F. Dowell Jr. v. U.S., 75-2 USTC ¶9819, 33 AFTR2d 74-739, 370 F.Supp. 69 (D.Ct. Tx.,
1974)
Note that the text gives three different cites to references for where U.S. District Court,
Court of Appeals, and Claims Court decisions may be found (see page 2-26).
The cite from the publishing firm of Commerce Clearing House (more commonly
referred to as the CCH cite) appears first (USTC for United States Tax Cases where
CCH publishes all of District Court, Appellate Court and Claims Court decisions). The
cites from the publishing firms of RIA (PH) and West Publishing follow. For this class,
when you cite a case, it is sufficient to give only one cite. Don’t forget the year of the
case or the court that issued the decision. Whenever citing a case, underline or italicize
the name of the case. The first time you mention a case give the full citation (e.g., J.R.
Ewing, 65 T.C. 889 (1981)). In referring to the case later it is normally unnecessary to
repeat the citation (e.g., in Ewing, the taxpayer… would be sufficient).
Do not footnote your references to rulings and cases but incorporate them in the body of
your paper.
18. State your authority. You aren’t an authority nor are the editors of RIA or some journal
article. Be sure and state the official authority (Code, Regulations, Rulings, cases, etc.,)
on which you based your conclusions and analysis. Often times students cite a paragraph
from RIA as authority: It is not authority!
19. Avoid writing in the first person (i.e., I, we). It is unnecessary to state that “I believe”
or “we think” in your paper. This is presumed because you are the author. Try instead,
“it seems or it appears” or some similar language. Avoid using the second person “you”
as well.
20. Make sure your writing makes sense. Act like a third grader. Have mom or dad or your
roommate or spouse or someone read your paper to see if they can understand the
message you are trying to communicate. If they can’t understand it, no one will.
21. Do not make yourself look stupid. Know the difference between there and their, to and
too and two, it’s and its. Watch out for spelling errors. Misspelling receive, separate, and
anything else in this day of spell checkers is unforgivable. Such mistakes make a bad
impression.
22. Focus on the relevant issues. If something doesn’t pertain to the issue, don’t discuss it.
Don’t add superfluous information for filler. One paper concerning the deductibility of
home office expenses of a teacher discussed the special home office rules concerning
day care that were completely irrelevant to the issue at hand. The same paper reviewed
how the amount of deduction would be determined even though there were no amounts
given in the case. Focus on the relevant issues.
23. Proofread. Proofread. Proofread. Do not be lazy and say that only one mistake won’t
hurt you. The reality is that there are probably other mistakes that you have failed to
catch. Correct all you can.
24. Ensure a smooth transition from one paragraph to another. Don’t say, “now that we’ve
covered the Code, it’s time to cover the Regulations.” This sounds like my
son when he was 10 years old–pretty sophomoric–and I think you’re older and wiser.
25. Observe the formal rules of writing. Do not use contractions. Spell out numbers where
appropriate. Do not spell out dollar amounts.
26. Remember who your audience is. Here is a quote from the conclusion of a recent paper:
“Going over all of the tax laws and regulations can be a very complicating task.” I know
the task is complicated (and not complicating). There is no need to tell me or the
supervisor that assigned you the job.
27. For what it’s worth, someone once said (Vince Lombardi, Casey Stengel, Thoreau,
Bevis…) Strive for perfection, in so doing you will achieve excellence.
THE FILE MEMO FOR YOUR MAJOR TAX RESEARCH CASE IS WORTH
60% OF YOUR GRADE. COMMUNICATION PLAYS A HUGE ROLE IN THE
GRADE THAT YOU RECEIVE FOR THIS CASE AND THE COURSE!!
PAY ATTENTION 
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Spring
Reading Part 3
COMMUNICATING TAX RESEARCH:
WRITING THE FILE MEMO
Regardless of how well you have done your research, your efforts may be all in vain if you are
unable to successfully communicate your findings. The accounting professional must be able to
communicate intelligently and effectively!
Effective communication is not easy. It takes practice. Even the most skillful of writers must
learn the appropriate way to communicate their research findings. Face it—you must write,
rewrite and rewrite again in order to produce a good memo. But you don’t have time to do that
on the job! So, the best approach is to practice here and pay attention to feedback that you
receive.
A tax research assignment typically ends with some form of communication by the tax
professional about the results of the research. For example, the communication may be as
informal as a phone call or an e-mail to either the client or supervisor. But it also may be more
formal, such as a memorandum that serves as the basis (and documentation) for a formal letter or
other communication to the client. The research might also be the basis of an article for
publication in a newspaper, magazine or a professional journal. The communication could also
be a speech or an appearance on television or radio.
In all of your communications, remember who the audience is and write appropriately. If the
audience is a supervisor who is familiar with the issue, the communication will be much different
than that prepared for someone who is untrained in the area. If the communication is for the client,
it will much different than a detailed memorandum that is the basis for the client’s letter. If a
presentation is for a general audience, it will be much different than for a group of tax
professionals. Remember your audience.
The File Memo
The heart and soul of tax research communication is the memo to the file or file memorandum.
Most of a tax practitioner’s time is concerned with determining the client’s tax problem, identifying
the tax issues, finding the applicable law, interpreting the law, and evaluating the tax law to arrive
at a solution. When all of the research is complete, the practitioner typically writes a memorandum
to the client’s file as the basis for the formal communication to the client.
Assume that you have done all of the research and must now write a memorandum to communicate
your findings. How would you organize it? How should it be structured? Obviously, your product
should not look like one of Danielle Steele’s romantic novels, a Tom Clancy thriller, or a classic
comic book. Do you write it like a term paper complete with footnote references? Is the memo just
a series of findings and a conclusion? Do you just cut and paste what you have found in the tax
service? How should the memo start? How should it end? How should your findings be
summarized?
Many accounting and law firms require a standardized format for file memos. On the other hand,
there is no one format that is used by all firms. A possible format is shown below. But before
examining the sample memo, consider what the memo is trying to accomplish.
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The purpose of the memo to the file or file memorandum is to:
• Present the facts, issues, and conclusions of the tax research project
• Enable supervisors or colleagues (and, in your case, the instructor) to easily review what has
been done
The file memo should be constructed in a format that lends itself to a quick perusal of the pertinent
tax facts and issues. A typical file memo uses one of the following formats:
Facts
Issues
Analysis
Conclusion
Facts
Issues
Conclusion
Analysis
Summary
Do not use format #2 in
this course.
Facts
The memo should begin with a brief introductory summary of the facts and issues that face the
client. Remember that the memo tells a story and the reader will not be able to understand the
punch line unless he can understand the story. Consequently, start with the facts.
The importance of a correct statement of the facts cannot be overemphasized. The conclusion is
based on the facts and if a single fact is incorrect, the entire conclusion could be wrong. More
importantly, the reviewer (whether the review occurs shortly after the research is completed or
three years later when the return is audited and the author of the memo has long left the firm) must
know and understand the basis for the conclusion (the advice to the client). Similarly, and perhaps
more importantly, the client must understand that the answer that he or she receives is dependent
on the facts that the client provides.
Often, the gathering of the pertinent facts is the most challenging of the tax professional’s tasks.
(This not only true in tax, but in all of accounting.) Tax engagements typically begin with client
contact in the form of a phone call or meeting, followed by an exchange of copies of pertinent
documents such as letters, spreadsheets, trusts or wills, contracts, life insurance or annuity
agreements, employer handbooks, and diaries or logbooks of the client. In reality, though, the
initial determination of the facts is likely to be incomplete for the following reasons.


Taxpayers tend to see the dispute only from their own side. In short, the taxpayer’s view of
the facts and circumstances may be biased.
Taxpayers are not trained in the details of the technical tax law so they may be unable to
determine which facts are important. If you don’t ask the question, the taxpayer may omit
something that is important and not even know it. (When you ask additional questions,
include the answers in the statement of facts.)
In addition, fact gathering often turns on such intangible factors as the reliability of the memories
of the taxpayers and key witnesses, the ability of witnesses to withstand scrutiny in the deposition
and testimony phases of the case, unanticipated death or disappearance of key parties, destruction
of records due to casualty or computer mismanagement, and the tendency of some taxpayers to
“fix the truth” after the fact.
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Consider this rather simple situation. In late 1998, the client, a high-income, high-ranking
corporate officer, received a reimbursement of $50,000 for moving expenses incurred from moving
from Seattle to Baltimore in 1998. He subsequently took a new position in Indianapolis in early
1999. As a general rule, the reimbursement merely offsets deductible moving expenses so there is
no effect on the tax return. However, moving expenses are deductible only if the taxpayer remains
in the area to which he moved for 39 of the 52 weeks after the move. Thus, whether the client had
zero income or $50,000 of income (and $20,000 of tax) depended on how long the client had lived
in Baltimore, a seemingly straightforward question. The sticky part was asking the client when he
moved in and out of Baltimore. When asked how long he had lived there, the client calmly asked
what difference it made and then gave the “correct” answer.
Issue or Issues
After identifying the critical facts, the file memo normally lists questions that capture the tax issues
that are in dispute (e.g., is the travel expense deductible?). Some memos may have only one issue.
Each issue should be phrased as a question. Multiple issue should be numbered.
The questions are often followed by a short answer or conclusion (e.g., the travel expense is not
deductible because it was not primarily for business). This format (shown as format 2 on the
preceding page) allows the subsequent reader (your supervisor) to determine quickly whether each
issue is “pro” or “con” for the taxpayer and limits the time that may be required to sort through a
number of such memos. It can be omitted in a short memo (the first format on the preceding page).
Analysis
The analysis section presents a detailed review and evaluation of controlling laws, with full
citations presented in the standard forms. The meat of the memo is presented here, and the strengths
and weaknesses of both sides of the tax argument are developed and discussed.
In this part, you discuss the Code, how the regulations interpret the Code, how the court cases
interpret the Code, etc. Discussion of the cases and rulings is the most difficult aspect of writing
the memo. Tell a story. When you discuss a case, explain the facts of the case in sufficient detail
that your audience can appreciate the point you are trying to make. Tie the facts of the case to the
authority you cite to show the reader how you developed your conclusion.
 Hint: In writing a file memo, you are much like a judge who is writing his or her opinion. If
you are at a complete loss as to how a memo should be written, read several court cases to get the
feel.
Remember, the introductory file memo for Assignment P3 should consider **only** the Code.
Summary–optional (not to be used in this class)
In the summary, conclusions are given or repeated. Some memos may include recommendations
for subsequent actions with the client and may lay out other strategies as to tax return or audit
positions. The summary should be short: arguments belong in the analysis.
Conclusion or Conclusions
The conclusions should be simply stated—typically only one sentence. Avoid adding or restating
your analysis in the conclusion. If you have multiple issues, the conclusions should be numbered
to correspond with the issues.
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Remember Your Audience
As suggested earlier, the tone and nature of the file memo should recognize that its readers will be
restricted to fellow tax practitioners who are normally well versed in the federal tax law. You are
not writing the memo to your client—he will not be reading it! References to primary sources of
the tax law should be frequent and complete. One must presume that the ultimate reader of the
memo’s comments will need no introduction to the hierarchy of the federal tax system or to
statutory citation practices.
In practice, it often is helpful to attach pertinent references to one or more of the commercial tax
services to which the researcher’s firm subscribes. These should be provided as attachments to the
memo, perhaps on a sticky note, providing a clear paper trail to facilitate subsequent review and
commentary concerning the tax issue. (Do not cite these secondary sources for this class!)
Seldom will the researcher’s efforts result in merely the preparation of a research memorandum to
the file. In general, the memo will be accompanied in the file by briefs of one or more pertinent
court cases or administrative pronouncements. In addition, many practitioners append to the file
memo photocopies of critical court case opinions, regulations or rulings, and journal articles, often
featuring highlighting by a pastel marker.
Most recommend that practitioners restrict appended material to only those resources that are of
utmost importance, to reduce both client costs and the volume of the typical memo. An effective
statement of facts and issues, followed by a concise synthesis of the controlling law, is far more
valuable than a mass of duplicated, small-print tax reference materials. (File memos submitted for
this class should not have attachments or a references cited section.)
Sample Introductory File Memorandum
It often is necessary to gather additional information from a client after the initial
contact. When this occurs, the additional information should be included in your
statement of facts, along with the original information that was provided. When
you, or a colleague, refers to the memo at a later date (possibly a year or two later),
you’ll need to have all of the pertinent information on the record.
The issues and conclusions are numbered because there is more than one
issue/conclusion. Most memos will have only a single issue, and then it is not
numbered.
Date: February 2, 2024
To: File
From: Jane Student (A302 or A551)
Re: Mr. Jones’s filing status and ability to claim Nick as an exemption
Facts
Mr. Jones lives in Chicago. His wife died 10 years ago and he has not remarried. In August 2022, his
nephew Nick, Mr. Jones’s deceased sister’s son, moved from Des Moines to live with Mr. Jones for the
rest of the year. Nick had lived with his father for the first five months of the year and with his
grandmother for the next two months. Mr. Jones provided all of Nick’s support while he lived with him.
Because Nick needed an entire new wardrobe and extensive dental care, this support was more than the
total support everyone else provided for Nick during the entire year. Nick is 16, single, and a high
school student. He was born in the U.S.A. and had gross income of $3,000 during 2022. No one else
shared Mr. Jones’s home during 2022. Mr. Jones is not the dependent of any other taxpayer.
Issues
1. Can Mr. Jones claim an exemption for Nick in 2022?
2. What is Mr. Jones’s filing status for 2022?
Conclusions
1. Mr. Jones can claim an exemption for Nick in 2022.
2. Mr. Jones’s filing status for 2022 is single.
Analysis
Code §152(c)(1) provides that a qualifying child must have the same principal place of abode as the
taxpayer for more than half the year. Thus, Nick cannot be Mr. Jones’s qualifying child, or the
qualifying child of anyone else. However, a dependent may also be a qualifying relative, according to
§152(a)(2).
Section 152(d)(1) defines a qualifying relative as an individual (1) who meets a relationship test, (2)
whose gross income for the year is less than the amount of the dependency exemption deduction, (3) for
whom the taxpayer provides more than half of total support for the year, and (4) who is not a qualifying
child of any taxpayer for the year. Section 152(d)(2)(E) states that a son or daughter of the taxpayer’s
brother or sister meets the relationship test. [If Nick was not a nephew by blood, he would not be a
qualifying relative unless he had lived with Mr. Jones for the entire year, per §152(d)(2)(H).] Nick is a
qualifying relative for Mr. Jones.
However, three other qualifications also must be met for Mr. Jones to claim Nick as a dependent.
Section 152(b)(3) states that the dependent must be a citizen or resident of the United States or a country
contiguous to the United States. Nick is a U.S. citizen. Section 151(c)(2) generally provides that a
dependent cannot be a taxpayer filing a joint return. Because Nick is not married, this does not present a
problem. Section 151(c)(1) indicates that if the dependent is not the taxpayer’s child, the dependent
must have taxable income less than the exemption amount. Nick’s income of $3,000 is less than the
2013 exemption amount of $3,900.
In regards to Mr. Jones’s filing status, §2(b) defines head of household status. To qualify as head of
household, §2(b)(1)(A)(ii) states that an unmarried taxpayer must maintain his household for more than
half of the taxable year as the principal place of abode for a qualifying dependent. Because Nick did not
share Mr. Jones’s home until August 2022, this test is note met. Therefore, Mr. Jones cannot claim head
of household filing status and must file as single.