TAX MEMO A

Research Memo A:

Hint: Both fact patterns are based on a recently decided tax case

Fact Pattern #1

The legislature in the State of Red enacted a new law re­quiring out-of-state sellers to collect and remit sales tax on the retail sales of goods and ser­vices in the State. Sellers are required to collect and remit the tax to the State, but if they do not then in-state consumers are responsible for paying a use tax at the same rate. The Act covers only sellers that, on an annual basis, deliver more than $150,000 of goods or services into the State or engage in 200 or more separate transac­tions for the delivery of goods or services into the State.Your client is a B-etsy online retailer with no employees or offices in the State of Red and, therefore, has not collected any sales tax under the new Act.Your client has received a notice from the State of Red requiring your client to register for a license to collect and remit the sales tax. A refusal to do so will result in your client being prohibited from online sales of any goods or services in the State. Your client wants to know if the business must comply with the sales tax requirements of the State of Red.Also, what implications might this have in other states where your client does business online?

Prepare a tax memorandum for use in advising your client. State the issue(s) to be resolved and make sure to identify the specific authorities (code, statutes, case law etc.) that address your client’s tax issues.Make sure to weigh authorities both for and against your client’s position.

The memo should be 2 pages, double spaced, one-inch margins, 12pt.

Hint: search engine words “online seller” “sales tax” “court decision”

Fact Pattern #2

Your client, Smartbucks, a U.S. corporation conducts a major part of its coffee business through its wholly owned international subsidiary, Trader Jobs, located on the Turks and Caicos Island. As Smartbuck’s accountants, your firm does the tax planning for these two related companies to minimize or avoid the payment of taxes by Smartbucks in the US which is a higher tax jurisdiction than Turks and Caicos jurisdiction.

In the past Smartbucks sold industrial coffee equipment to Trader Jobs. Trader Jobs then sold the same equipment for profit. The profits from those sales were reported and taxed in the Turks and Caicos, which resulted in significant tax savings for Smartbucks.Your firm explained to your client that this transaction, known as “transfer pricing,” allows Smartbucks to shift profits

that would otherwise be subject to U.S. tax offshore to avoid tax. Your firm wants to use the same method to identify and shift costs between Smartbucks and Trader Jobs.

Specifically, Smartbucks has formulated a new latte coffee recipe with Trader Jobs and both companies would benefit taxwise if the research and development costs could be shared between them. To document the transaction, Smartbucks and Trader Jobs entered into a research and development (“R&D”) cost-sharing agreement which allows Trader Jobs the authority to license the new recipe internationally. You previously advised your client that the interplay of cost and income allocation between the two companies in this transaction will result in significantly reduced taxes for Smartbucks.

You also advised your client that there is some risk in engaging in multinational corporate tax

avoidance because the tax laws grant the IRS authority to allocate income and costs between related parties if it determines that any particular transaction fails to satisfy the arm’s length standard. As part of the R&D cost sharing agreement, your firm did not share the cost of certain employee stock options resulting in a substantial tax savings to Smartbucks in association with over $100 million in income. The IRS has reviewed the transaction and contends that the allocation of stock compensation costs between the companies must be appropriate to reflect

economic reality and that the allocation of the employee stock compensation costs under the cost sharing arrangement fails the arm’s length standard. On behalf of Smartbucks, your firm contends that the IRS has exceeded its authority under the arm’s length standard because the cost sharing methodology used in the R&D cost sharing agreement established “parity with uncontrolled taxpayers” and the actual results or economic reality is irrelevant under the arm’s length standard.Methodology controls over result.

Prepare a tax memorandum for use in advising your firm’s managing partner assigned to Smartbucks. State the issue(s) to be resolved and make sure to identify the specific authorities (code, statutes, case law etc.) that address your client’s tax issues.Make sure to weigh authorities both for and against your client’s position.

The memo should be 2 pages, double spaced, one-inch margins, 12pt.

Hint: search engine words: “related entities” “cost sharing” “court decision”

Tax Research Memo
Sample Format
Your Firm
Your Town and State
Date
Relevant Facts
This section should summarize the important facts of the research case. Only
include the relevant facts in a clear and concise manner.
Specific Issues
Identify the issue(s) and state the issue(s) in the form of a question.
Conclusions
Think of your conclusion as the “short” answer to your issue. The conclusion
section is the place to provide tax advice, recommend action(s) for the client to take,
or identify the need for additional information. There may not be a single “best”
alternative to the client’s issue so be sure to consider all applicable alternatives.
Support your conclusion by referencing back to the authority you discussed in the
discussion and analysis section.
Support
This section discusses the issue(s). Begin with the relevant code section(s).
Identify the code section, paraphrase what it says and then discus why it’s
important. Discussion of the relevant Treasury Regulations should follow. Identify the
regulation, paraphrase the important sections, and then address the importance of
the regulation given the facts.
The discussion
should continue by
reviewing relevant Treasury
pronouncements (Revenue Rulings, Revenue Procedures, Letter Rulings, etc.) and
cases. Be sure to include complete cite for each authority. Summarize the important
facts for the pronouncement/case and then compare the facts of the
pronouncement/case to the research facts. Discuss how the facts are similar or
different. Explain how each ruling or case supports or weakens the clients’ position.
Documentation is a very important part communicating tax research and all
statements or opinions should be substantiated with supporting cites. Supporting
cites should be to primary sources only except in rare or unusual situations.