Question

Taxpayer, a calendar-year corporation, wants to change its company's headquarters-currently consisting of a ten-story building. The company currently owns the building outright. Taxpayer has identified some potentially more suitable properties. One of the possible properties is a single-story building on a large, attractive lot. The other property consists of a two-building complex, with retail shops on the groung floor of one building and resedential rental property in a portion of the other building. After further discussions with the client and a review of relevant documents, you discover the following additional facts: each of the new properties has a fair market value that slightly exceeds that of the current ten-story building. Taxpayer would demolish the single-story building if the company purchases that property. It would then build a specially designed building on the lot. The sellers of both properties appear to be interested in entering an exchange transaction whereby the company's property would be exchanged for one of the other properties. After many discussions with the taxpayer, the company decided to exchange its existing property for the retail and residential building complex. You assisted the company in structuring the exchange. Both parties used a "middleman" corporation, to whom the properties were to be initially conveyed. The agreement with the middleman included the requirement that the taxpayer sell its property to the middleman, and then, within 45 days of the initial closing, formally identify which of the two new properties it intended to acquire. The identified was also to be sold to the middleman corporation. The corporation would then transfer title to the taxpayer within 180 days after the date of the initial closing. Unfortunately, the transaction has not proceeded as planned. Taxpayer transferred its property to the middleman, receiving its FMV of $10,000,000 in cash. The company formally identified the property with the retail and residential building complex as the property it intended to acquire. Unfortunately, one week before the 180 days was up, the seller of the property backed out of the arrangement. Taxpayer is certain it will not be able to identify and cause the transfer of other suitable property within the time limit. Taxpayer's basis in the ten-story building is only $2,000,000. The company is concerned that it will now have to report the $8,000,000 in gain.

a. How would you advise the taxpayer? Prepare a memo with issues, assumptions (if necessary), conclusions, reasoning, and authority.

b. In general, is there any type of action or planning that a taxpayer could/should do to avoid a problem like this?

Answer 1

a. How would you advise the taxpayer? Prepare a memo with issues, assumptions (if necessary), conclusions, reasoning, and authority.

Answer ;

Tax practitioners occasionally uncover or otherwise become aware of errors in the previously filed tax returns of their clients. As a general rule, tax practitioners in such situations should lose no time in communicating news of the error to the client. This general duty is embodied in rules applied by both the AICPA and the IRS. Nevertheless, principles governing this duty are often far easier to articulate in theory than they are to apply in practice.

To begin with, the scope of the duty and the extent of the obligations it places on practitioners are by no means clearly delineated, particularly in the gray areas that sometimes confront even the most scrupulous and ethical of tax practitioners. Moreover, the sheer brevity of the general rule, which appears straightforward on its face, all but requires practitioners to look beyond its letter in many cases and be governed by its spirit to arrive at an interpretation that reconciles reasonable administrability with rational professional conduct.

Memo with issue

Tax professionals often must document and communicate their tax research. Clear written communication is important since tax planning ideas or IRS audits can cause prior tax returns to be amended or adjusted long after originally filed. The tax professional may have long since forgotten the reasons for his or her research conclusions, so it is essential that the relevant tax authorities and rationales be thoroughly documented and clearly explained. In some cases, the tax professionals who prepared the research memo may no longer be with the firm, increasing the importance of written communication that others can follow easily. Writing a tax research memo is an art. Tax professionals do not universally use the same techniques. Generally, the more time taken to prepare a research memo, the less time necessary to review it. The method we propose is biased toward the ease of review and, thus, becomes more appropriate as the difference in compensation rates between the memos reviewer and preparer increases. Conclusions As with the statement of facts, the tax professional should express all issues clearly and unambiguously; that is, the meaning of issues should be subject to only one possible interpretation. When the issue is written unclearly or ambiguously, the tax professional may research the wrong issue. Or, the reviewer may be uncertain about the issue and whether the correct issue was researched. Provide sufficient detail so that the issues tax implication is clear, but avoid including a detailed cite within the issue. As appropriate, express issues in the context of major tax concepts like gross income, capital gain, exclusion, deduction, credit, and basis. b. In general, is there any type of action or planning that a taxpayer could/should do to avoid a problem like this? Answer ; (1) This section applies when the Tax Authority is satisfied that: (a) a scheme has been entered into or carried out. (b) a person has obtained a tax benefit in connection with the scheme. (c) having regard to the substance of the scheme, it would be concluded that a person, or one of the persons, who entered into or carried out the scheme did so for the sole or dominant purpose of enabling the person referred to in paragraph to obtain a tax benefit. (2) Despite anything in this Act, when this section applies, the Tax Authority may determine the tax liability of the person who obtained the tax benefit as if the scheme had not been entered into or carried out, or as if a reasonable alternative to entering into or carrying out the scheme would have instead been entered into or carried out, and can make compensating adjustments to the tax liability of any other person affected by the scheme. (3) If a determination or adjustment is made under this section, the Tax Authority must issue an assessment giving effect to the determination or adjustment. (4) An assessment under subsection must be served within 5 years from the last day of the tax year to which the determination or adjustment relates. (5) In this section: “scheme” includes any course of action, agreement, arrangement, understanding, promise, plan, proposal, or undertaking, whether express or implied and whether or not enforceable; “tax benefit” means: (a) a reduction in a liability to pay tax, including on account of a deduction, credit, offset or rebate. (b) a postponement of a liability to pay tax. (c) any other advantage arising because of a delay in payment of tax. (d) anything that causes: (i) an amount of gross revenue to be exempt income or otherwise not subject to tax. (ii) an amount that would otherwise be subject to tax not to be taxed.