Tax Research MEMO

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TAX RESEARCH MEMO

NOTE: Your discussion of the tax law MUST include: At least one Internal Revenue Code Section At least one Treasury Regulation At least two court cases or revenue rulings. (This could be two cases, two rulings, or one case and one ruling.)

Guidelines: The memo should include a thorough discussion of the facts, the specific issues to be resolved, the conclusion, the appropriate tax authority that addresses these issues, an evaluation of this authority (i.e., how does the authority relate to your client’s facts), and a summary. I will evaluate the case as if I was a tax manager at a public accounting firm, and I had given you this assignment. The case should be written with proper grammar and spelling. Each assignment should be typed or word-processed. In general, these problems should be addressed in 2 - 3 double-spaced pages. Other helpful notes for these write-ups are:

1. It may be helpful to diagram the transactions in the problem.

2. Some problems may have more than one issue that needs to be addressed.

3. Make sure that you cite primary sources of tax authority in your answer. For example, a direct cite to only your textbook would be inappropriate.

4. Make sure that your conclusion is clearly stated and supported by the discussion.

5. Twenty-five percentage points will be deducted from your grade for each day the assignment is turned in late. A partial day late counts as one full day.

6. The projects will be graded on the following criteria: Writing Style, Grammar, Locating Proper Research Sources, Analysis of the Law to Your Facts, Organization of Memo

7. Your memo should have at least the following sections: Facts, Issues, Law, Discussion, Conclusion

Research Problem 2 Seaweed Salvagers is a corporation engaged in producing foodstuffs from seaweed. Seaweed's primary salvaging plant is in California. Because salvaging technology hasn't changed through the years, Seaweed's primary salvaging equipment was purchased in the early 1970s. At that time, the primary insulation material used in the machines was asbestos. In 1986, the Occupational Safety and Health Administration lowered the standard for concentrations of allowable airborne asbestos fibers in the workplace. In addition, California requires employers to monitor airborne concentration levels to ensure that they do not exceed permissible exposure levels. To comply with these requirements and to provide its workers with a safe workplace, Seaweed institutes an asbestos abatement program. After careful study, Seaweed determines that the major asbestos problem occurs during ordinary repairs and maintenance of the equipment. Initially, Seaweed institutes a program of continuous monitoring and encapsulation during repair and maintenance periods. However, Seaweed finds that this is inadequate because (a) it does not ensure that all parts of the plant are in compliance, (b) repairs and maintenance costs are increasing dramatically, and (c) the

extra down time during maintenance and repairs reduces production to a level that is financially unprofitable. During the current year, Seaweed begins removing the asbestos insulation from the machinery and replacing it with an alternative, environmentally friendly insulation material. The new insulation material is about 15% less efficient than the asbestos material and results in no energy or other cost savings. The cost of replacing the insulation in 1 machine is about $13,000. The annual repair and maintenance cost of 1 machine averages $45,000. Each machine has an estimated fair market value of $600,000. Seaweed believes that it should be able to expense the cost of removing the asbestos insulation and replacing it with the alternative insulation. Your firm has been hired to investigate this issue and advise as to the proper tax consequences. Write a memorandum to your supervisor explaining your recommendations