Fact Pattern #1

I had  to do a research assigment (draft),  but i have some changes to make. Below im adding some comments from the advisor and im also adding the original assigment + what i did and other comments the professor added in my document ( the highlight in yelow is the part i need to make changes and the red letters are the comments made by the profesor)

Be sure to provide an analysis of why the code applies. To quote Professor Weismann, “Be specific in your analysis. Don’t leave it to the reader to figure this out. Make your best case!”

Develop the support section using specific code/law that applies to the specific situation.

You should be using RIA Checkpoint to find the appropriate code/law that applies to the case.

Remember, you are writing a memo to advise your client. Tell them what they should do. Use case law, statutes, acts, etc. to make your point.  Use RIA Checkpoint to find the relevant law.

From the assignment:  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.

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”
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Fact Pattern #1
Out-of-State Sellers
State of Red
1/3/2024
Relevant Facts
Recently, the State of Red adopted a new rule requiring out-of-state sellers to collect and submit
sales tax on retail transactions of goods and services conducted inside the state. Vendors are
required under the Act to collect the tax and submit it to the State; otherwise, in-state consumers
may be required to pay an equivalent use tax. The Act specifically targets merchants that carry
out 200 or more separate transactions with the intention of supplying goods or services into the
State, or who provide more than $150,000 worth of products or services into the State on an
annual basis.
Since B-etsy is an online store without workers or a physical location in the territory of Red, it
has not been required to gather sales tax within the new Act. “Check this.”
B-etsy was notified by the State of Red that a license was required in order for it to be allowed to
collect and pay sales tax. If B-etsy doesn’t comply, it won’t be allowed to undertake online sales
of any goods or services in the State. B-etsy is worried about possible repercussions in other
states where it does commerce via the internet, therefore it is looking for clarity on whether it
must abide by the sales tax laws enforced by the government of Red.
Specific Issues “Specific Issues need to be in question format.”
The question of whether B-etsy, an online retailer devoid of physical presence in the
State of Red, is legally obligated to adhere to the state’s new sales tax requirements prompts a
multifaceted analysis. The determination hinges on the evolving landscape of e-commerce
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taxation laws and the reach of Red’s regulatory authority over businesses operating within its
virtual borders. Examining the potential implications extends beyond Red, encompassing other
states where B-etsy conducts online business. The complexities lie in navigating the varying
sales tax frameworks across jurisdictions and understanding the extent to which B-etsy’s digital
transactions might trigger tax obligations. The outcome has far-reaching consequences,
influencing B-etsy’s compliance strategies, financial obligations, and legal standing in an era
where the digital economy and interstate commerce pose intricate challenges for businesses
grappling with the intersection of technology and taxation.
Conclusions
If B-etsy satisfies the standards set out in the new law passing the yearly delivery barrier or
doing the required number of transactions, for example it will have probably have to abide by
the State of Red’s sales tax laws. If you don’t follow through, the State of Red can ban internet
sales.
Support
“Be sure to provide an analysis of why the code applies. To quote Professor
Weismann, “Be specific in your analysis. Don’t leave it to the reader to figure this out.
Make your best case!”
Develop the support section using specific code/law that applies to the specific
situation. You should be using RIA Checkpoint to find the appropriate code/law that
applies to the case.
From the assignment: 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.”
3
The State of Red’s authority to impose sales tax obligations on out-of-state sellers can be
used. Additionally, case law supports the imposition of such obligations. It is crucial to examine
court decisions and legal precedent regarding the taxation of online sales to effectively navigate
B-etsy’s obligations.
Actions to Be Taken “Just check one of the boxes for this section.”
Engage in a detailed conversation with the client on 1/3/2024 to delve into crucial
matters. Following this discussion, craft an extensive memo or letter for the client. This
document will meticulously outline the legal intricacies, obligations, and repercussions linked to
non-compliance. Extend your examination to diverse scenarios, evaluating B-etsy’s vulnerability
in multiple states. Ponder the prospect of acquiring legal counsel from the State of Red for a
nuanced comprehension of potential consequences. Thoroughly navigating this legal landscape
ensures a proactive approach, safeguarding against unforeseen challenges. Prompt action and
strategic insights will empower the client to make informed decisions in a complex legal
environment.
Preparer: Erick Ali
Reviewer: Alex Bruner
Partner: William Arim
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Fact Pattern #2
Smartbucks
Turks and Caicos Islands in U.S.
1/3/2024
Relevant Facts
Trader Jobs, a fully owned overseas subsidiary of the U.S. firm Smartbucks, is based in
the Turks and Caicos Islands and handles a major percentage of the company’s coffee business.
Because Turks and Caicos has a lower tax jurisdiction than the United States, your company, as
Smartbucks’ accountants, manages tax planning for both businesses to reduce or avoid taxes.
“you copied and paste this. You need to change as if you are writing a memo to your
client Smartbucks.”
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In the past, Smartbucks engaged in a profitable practice of selling industrial coffee
equipment to Trader Jobs, who subsequently made money by selling the equipment. Because the
ensuing earnings were reported to and taxed in Turks and Caicos, Smartbucks was able to save a
significant amount of money on taxes. Through a technique called “transfer pricing,” Smartbucks
is able to move earnings abroad and avoid paying taxes in the United States. Now, your company
wants to find and transfer expenses between Trader Jobs and Smartbucks using a similar
approach.
More specifically, Smartbucks and Trader Jobs have worked together on a novel formula
for latte coffee, and both businesses stand to gain from splitting the accompanying research and
development (R&D) expenses. They formalized this arrangement by signing an R&D costsharing contract, which gave Trader Jobs the authority to license the new formula globally. The
substantial tax benefits arising from the interaction of cost and income allocation between the
two firms were brought to Smartbucks’ attention by your prior advice.”check this”
There could be an obstacle, however. Regarding some employee stock options, the R&D
cost-sharing agreement’s distribution of stock compensation expenses has been challenged by the
IRS. According to your business, the arm’s length norm has been violated by the IRS, and in
order to ensure “parity with uncontrolled taxpayers,” the cost-sharing technique must be
followed, regardless of economic realities. Having been allocated to Smartbucks, your managing
partner at the business is looking for guidance on how to handle this complex tax scenario.
“check this”
Specific Issues “Specific Issues need to be in question format.”:
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The dispute between the IRS and Trader Jobs about the distribution of stock
compensation expenses in the R&D cost-sharing arrangement presents difficult issues for the
IRS to defend. Analyzing whether the agreement’s cost-sharing model can be justified as creating
“parity with uncontrolled taxpayers” requires a careful assessment. To top it off, the debate over
the arm’s length norm gains further depth when economic realities are taken into account. To
ascertain if the allocation complies with industry standards and whether the arrangement’s
economic terms are compliant with regulations, it is necessary to investigate the complexities
surrounding the matter.
Conclusions
Potential risks are raised for Smartbucks by the IRS’s challenge over the distribution of
stock compensation expenses; hence, a thorough analysis of the arm’s length requirement and the
particulars of the R&D cost-sharing agreement are necessary.
By claiming that economic reality is subordinate to the arm’s length norm, the defense strategy
should place a strong emphasis on establishing “parity with uncontrolled taxpayers” via the
selected technique.
Support
“Be sure to provide an analysis of why the code applies. To quote Professor
Weismann, “Be specific in your analysis. Don’t leave it to the reader to figure this out.
Make your best case!”
Develop the support section using specific code/law that applies to the specific
situation. You should be using RIA Checkpoint to find the appropriate code/law that
applies to the case.
7
The arm’s length standard and the relevant provisions related to cost-sharing agreements
can be used. Case law may shed light on similar situations and provide precedents for defending
Smartbucks’ position.
Actions to Be Taken
Discuss with the firm’s managing partner assigned to Smartbucks. Date discussed
1/3/2024
Prepare a comprehensive memo or letter outlining the legal and tax implications,
defending the chosen cost-sharing methodology and addressing the IRS’s concerns.
Conduct a thorough review of the arm’s length standard and related court decisions to
strengthen the firm’s position.
Consider engaging legal experts with expertise in multinational corporate tax issues for
additional guidance.
Preparer: Erick Ali
Reviewer: Shikhilah Moraa
Partner: Erickson Fred