Posted: March 1st, 2023

Tax Research Assignment– Analysis Memo Hank Moody, an executive for a healthcare company in Dallas

Tax Research Assignment– Analysis Memo

Hank Moody, an executive for a healthcare company in Dallas, TX, has approached our firm, The Comet Group, due to recent interaction with the IRS. Over the past few years, Hank acquired and renovated several properties in the Dallas area, ultimately intending to lease them for use by various tenants. Hank is the sole owner of these properties. Hank’s daughter, Becca, began her freshman year at the University of Texas at Dallas in the Fall of 2018. Hank hopes to use the income from these properties to pay for Becca’s college tuition, as well as her living expenses.

In December 2017, Hank successfully leased his first property. The lease began on January 1, 2018, and the tenants made their first rental payment that same day. The contract stated that the lease is for one year (i.e., it ends on December 31, 2018) and specified that the tenants would pay rent of $1,000 on the first day of each month. Thus, the total rent collected from the tenants for 2018 was $12,000. The tenants paid their rent each month on time.

Hank had discussed his intentions to use the income from the rental property to fund Becca’s education with his friends. One of them suggested that Hank have the tenants pay rent directly to Becca so that she, rather than Hank, would earn the income and be responsible for paying tax on it. His friend reasoned that, because Becca only has a part-time job, she would pay tax on the rental income at a lower rate than Hank, which would allow the income to cover more of the cost of her education. Hank was delighted to receive this advice from his friend, and he implemented it. The rental contract specified that the tenants send their payments directly to Becca Moody. The tenants complied with the terms of the contract, and Becca cashed their checks each month and used the money to pay for her education expenses. Becca reported $12,000 of rental income on her 2018 tax return and paid the appropriate tax.

After examining Hank’s 2018 tax return, the IRS issued a deficiency assessment claiming that the $12,000 of rental income reported by Becca constituted income to Hank, and thus, should be included in Hank’s income under I.R.C. Section 61(a)(5). Hank has requested our assistance because he disagrees with the IRS’s position and believes that he is not required to include the income in his gross income given that the rental payments were paid directly to Becca. How should we advise Hank?

Assignment:

1) 1) Look up and review the following authorities:

I.R.C. Section 61(a)

Treas. Reg. Section 1.61-1(a)

Lucas v. Earl,281 U.S. 11 (1930)

In addition, you will need to locate one additional court case that corresponds well to the facts of this case.

2) Draft a file memo to me (your manager at The Comet Group) analyzing the issue brought forth by the client. Your memo is to be no longer than 2 pages in length (single-spaced, 12 pt. font). Note: You will be graded on the thoroughness of your analysis and support for your conclusions. Therefore, in addition to citing and summarizing the relevant authorities and stating your conclusion, you should compare your client’s facts to the facts of the court cases, discuss similarities and differences between the cases and your client’s situation, and indicate how the IRC Section and Treasury Regulation apply to your client. I have provided a sample memo (that may be used as a template for this assignment) with more detailed instructions on how to draft the document.

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