ACCT

Introduction to Income Taxation

Project 2

Your assignment is to individually prepare a tax file memorandum. Please see Chapter 2 in the textbook for an example. As in the example, your tax file memorandum should include the Facts, Tax Issue(s), Conclusion, and Analysis.

Use the UMKC library website to search the Checkpoint database (UMKC Library website/Select “Databases”/Click “C” under Browse Databases by Name/Select “CheckPoint”). Additional guidance on conducting tax research is provided in Section 2.2 Working with the Tax Law – Tax Research in Chapter 2.

Taxpayer Information:

Mary Kate and Ashley Molsen purchased an apartment building back in 2009 as equal tenants in common. After a hectic decade of 50/50 co-ownership, the sisters determined that their business association should be terminated and decided to get rid of the apartment building. This led to a sale of the apartment building and a division of the proceeds.

The realized gain on the apartment building for each sister was $200,000. Mary Kate planned to recognize the gain on her share and use the net proceeds to invest in stock. However, Ashley wanted to defer any recognized gain, so she had worked with a realtor to identify property that would be eligible for §1031 like-kind exchange treatment. The realtor identified a single-family home in the Blue Ridge Mountains that was currently being rented by the owner. Ashley agreed with the choice and worked through the realtor to acquire the single-family Mountain house in exchange for her share of the apartment building. Ashley deferred all of her realized gain.

After attempting to rent the Mountain house for eight months without success, Ashley concluded that she could not continue to make the mortgage payments on both her principal residence and this rental property. To ease her financial liquidity problem, Ashley sold her principal residence for a realized gain of $175,000 and moved into the Mountain house. She reported no recognized gain on the sale of her principal residence as the sale qualified for §121 exclusion treatment.

The Internal Revenue Service (IRS) issued a deficiency notice to Ashley associated with the exchange of the apartment building for the Mountain house. The position of the IRS was that Ashley did not hold the Mountain house for investment purposes as required by §1031 (the code section on like-kind exchanges). Instead, the IRS contended that Ashley’s intention was personal – to use the Mountain house as a replacement for her current residence that she planned on selling. Who should prevail?

Hint - you will find guidance from the following sources of tax authority:

1. Internal Revenue Code Section 1031. Be sure to cite this code section in the memorandum and explain relevant portions.

2. Once you have located this code section, search for tax regulations and/or court cases relevant to this issue. Be sure to cite and explain relevant sources in the memorandum. The following case may be helpful:

Patrick A. Reesink, 103 TCM 1647, T.C.Memo. 2012–118

Your score on this assignment will be determined as follows:

Professional format (see textbook Exhibit 2.7) 10 Points

Clearly written 10 Points

Identification of issue 10 Points

Citation and explanation of appropriate tax authority* 10 Points

Citation and explanation of appropriate case law** 10 Points

Total 50 Points

*Do not merely copy tax code, regulations, etc.! As in the book example, the tax authority should inform the discussion in the “Analysis” section of the memo. Explain the relevant tax authority and how it applies to the taxpayer’s situation.

**Be sure to discuss similarities and differences between court case facts and the taxpayer’s facts to the assess relevance of judicial decisions to the taxpayer’s situation.