Introduction3
Memorandum one4
Peaceful tax. 4
Facts 4
Issue. .4
Answer. .4
Analysis..4
Memorandum two..5
Facts5
Issue.5
Answer.. ..6
Analysis6
Assignment 3 .7
Publicly traded partnerships.. 7
Benefits of publicly traded partnerships 7
Summary..8
Resources used.8
Memorandum oneTo: From: RE: Peaceful taxFactsPeaceful is an accrual basis taxpayer that provides funeral services and sell related goods to these services. Owing to the rise in goods and services, customers have found it very difficult to pay their goods conveniently, to the extent that some of these clients have opted for cheaper goods and services ( Larson& Sheaffer, 2011).This move has worked to the disadvantage of Peaceful. As a result of this challenge, the company has decided to come up with prepay services in which they can prepay at a discount. The payments can be refunded at the contract purchaser's request anytime up to the time the goods are provided to them.According to IRS, this amount paid under Peaceful program constitutes prepaid income and consequently must be included in Plateful’s income for taxation purposes.IssueIs it legal to tax prepaid services and goods in Peaceful program?AnswerThe prepaid services should not be treated as advance income but rather as security because the company does not have complete dominion over the deposits and that these payments are also refundable upon request by the customer.AnalysisBoth the Peaceful Company and the IRS attest to the fact that there should be taxation if there is any chance that one receives advance income. Deposits that would serve to secure payment of goods and services in the future is very much similar to an advance payment of the goods and services in question. When the purpose of the deposits is to guarantee payment of goods owned to a creditor, it is an advance payment and should be taxed. However, when the purpose of the deposit is to secure the property of interest to the taxpayer, this deposit constitutes security deposit.From a commercial view, the loan is more or less similar to advance income given the fact that there will be an economic benefit. It is so because a person only goes for a loan if they are confident of some returns in the event that they will repay the loan. This is the sole purpose why loans get taxed. The IRS should not base their facts on the economic benefits from the receipt of deposits.What qualifies as an income is that good or service that a person completely dominates.Peaceful did not enjoy full dominance over these deposits since they were very much subject to express obligation to repay the deposits once the services terminate or when the customer established good credit ( Larson& Sheaffer, 2011).Given that the customer fulfilled their legal obligations to make timely payments, thus, gets a deposit refund. Such a decision was completely within the control of the customer from the timing and the method of repayment. The company does not take part in influencing this decision in any way.On the other hand, total dominance should not be based on the fact that use of these deposits is not a constraint for a period. Instead, it should be based on the taxpayer has guarantee that they can keep the money which is not the case seen in Peaceful. These deposits are not expected to generate income and consequently subjecting them to taxation constitutes the violation of the taxation rules.Memorandum twoTo:From:RE: Mega Corp Inc.FactsMega Corp Inc. purchased all the assets of Little Inc. and in the process it acquired some of Little’s liabilities. The liability in this instance was when little took part in patent infringement case whereby Ideas Inc. was alleging that Little Inc. had violated its patent ( Larson& Sheaffer, 2011).It eventually resulted into Little Inc. owing Ideas some significant amount of money. Mega Corp Inc. accepted the legal responsibility for any judgment Little Inc. would have to pay Ideas Inc. in a lawsuit.Upon hearing, it was concluded that Little Inc. had infringed Ideas patent and, therefore, awarded them $5 million in damages. Mega Corp paid Ideas the $5 million and deducted the payment as an ordinary and mandatory expense under section 162.IRS reclassified the $5 million as a capital expense and disallowed the deduction under 262.QuestionShould the IRS classify the $5 million payment as a capital expense and disallow the reduction?AnswerThe IRS has not clearly demonstrated that the $5 million is a deduction or capital expense and so it should be treated as ordinary or necessary expense according to 162. Besides, the acquisition of a new asset is sufficient reason for classification as a capital expenditure (Larson& Sheaffer, 2011). Analysis According to section 162, deductions are made when ordinary or unnecessary expenses paid or incurred in the taxable year when carrying out any trade or even business when rentals or other payments gets to be a condition for the continued use or possession, for reasons of the trade transaction. In section 263, no deduction is allowed in any amount spent in restoring property or making good exhaustion, therefore, allowance realization.Deductions are exceptions to the process of capitalization and only given suppose there is a clear provision for them in the law and also the taxpayer should have met the burden of showing a right to deduction ( Larson& Sheaffer, 2011).Incidental future streams of income do not warrant capitalization. A taxpayer's actualization of benefits beyond the year in which the expense is incurred is vital in determining whether appropriate tax treatment is immediate reduction or capitalization. The IRS did not provide this when drawing their conclusions.
Section 162 allows a deduction of all ordinary and necessary expenses that are paid or incurred during the taxable period which in most cases is a year on any trade or business. Section 263 does not permit a inference for capital expenditure (Larson& Sheaffer, 2011). Capital expenditure in this case classifies as the quantity funded out for new structures / permanent enhancements made to improve on the value of property or estate. Also, the primary effect of classifying payment as either a business expenditure or capital expenditure concerns the timing of the taxpayer's cost recovery. Income tax inference is a substance of jurisdictive responsibility and the burden of showing right to be acclaimed deduction rests with the taxpayer. Most importantly, in section 162 to qualify for a deduction in 162(a) an item must be funded or experienced throughout the taxable year, for carrying any trade or business, be an expense, be a necessary expenditure (5) be an ordinary expense. The fact that Mega Corp was acquiring Little Inc. makes every liability that the company owed to be part of its acquisition process. Section 263 is not clear as to what constitutes deduction and does not clearly define what ordinary expenditure is or necessary expenditure.Assignment Examples of oil and gas publicly traded partnerships include:Central energy partnersCheniere energy partnersEnbridge energy partnersKinder Morgan energy partnersWestern Gas partnersMark West energy partnersWestern Gas PartnersCypress Energy PartnersBenefits of publicly traded partnershipsSuppose a passive activity becomes an active activity whereby the taxpayer materially takes part, the suspended losses can be taken to counterweight revenue that comes from the new activity although it has to be the same activity as when it was a passive activity ( Larson& Sheaffer, 2011). During the year in which the business becomes active, the suspended activities still have their passive character. Thus, implies that they can be used to offset passive income only in that given year. In the event that losses are pushed to the coming year, they can be deducted against the income of the currently active business. Further, the losses can be used to offset income from other activities.There is no disclaimer.
References
Larson, J., & Sheaffer, D. (2011). Federal tax research. Durham, N.C: Carolina Academic Press. Everett, J. O., Hennig, C. J., & Nichols, N. B. (2008). Contemporary tax practice: Research,
planning and strategies. Chicago, IL: CCH.
