05 Apr Understand the role of a tax practitioner Identify the tax issues involved in a scenario Be able to conduct comprehensive tax research utilizing on-line tools in order to formul

Hawaiian Memories, Inc. Tax Research Memorandum

Due Date: Wednesday, April 19th at 11:59 pm

Purpose: The purpose of this is to enable you to meet the following goals:

· Understand the role of a tax practitioner

· Identify the tax issues involved in a scenario

· Be able to conduct comprehensive tax research utilizing on-line tools to formulate a solution to the issues raised.

· Be able to articulate and defend a tax position in writing.

Task: In order to successfully complete this assignment, you must:

· Prepare a memorandum to the tax manager outlining the information you found in your research.

· Follow the examples of file memoranda using the formatted Word document included. Format the memo to include:

· Restatement of Facts (paraphrase)

· Identify at least three main issues based on these facts

· Provide a conclusion for each issue

· Include the analysis that led you to the conclusion for each issue. This analysis should refer to the primary authority that best addresses the issue.

· Primary authority would include items such as the Internal Revenue Code, Regulations, Court Cases, etc. These also should be paraphrased to highlight your understanding of the primary authority and how it relates specifically to the issue. IRS Publications and Tax Topics are NOT considered primary authority for this assignment.

· Submit the assignment using a Turnitin assignment drop box.

· Turnitin, is an online resource that checks your work against the submissions of others, books, articles, tax code, etc., to verify originality of your content.  Given that everyone in the course is working on the same problem and using the same format, the service will likely find some similarity in your paper.  Upon submission you will be able to see your score immediately, as others submit their papers your score may increase.  Should you resubmit your paper, the originality score will not be viewable for 12-24 hours.  

· I use the information supplied by Turnitin as well as my professional judgment to determine the originality of your paper. A high similarity rating is an indication of either plagiarism or insufficient original content, any submission with 20%+ similarity score will receive additional scrutiny. Plagiarism is a serious issue which would be a violation of the student code of conduct and would be reported to Student Affairs.

· I will accept late assignments for no more than 48 hours after the due date, with a 20% penalty.

The writing assignment will be graded based on grammar, style of writing, logical development of ideas, critical thinking skills, and technical accuracy of the analysis and conclusions, using a rubric, which is found below. 

Rubric to be used for grading

	Expert	Average	Novice
Content 35 points	35 Contains ALL the following: -All major issues identified and thoroughly analyzed. Thorough analysis of each issue	32 Contains ANY of the following: Identified most of the relevant issues. -Good Analysis most issues addressed	28-0 Contains ANY of the following: -Several relevant issues not addressed -Insufficient analysis
Complete-ness 20 points	20 Contains ALL the following: -Proper primary authority citation for all issues. At least one includes primary authority other than code sections. -Conclusion and/or recommendation offered	17 Contains ANY of the following: -Most issues contain primary authority of Code Sections. – Conclusions and/or recommendations not offered for all issue	15-0 Contains ANY of the following: -Primary authority not cited -No conclusions and/or recommendations offered
Readability 20 points	20 Contains ALL the following: -Well written easy to follow clearly discusses issues. -Followed recommended format.	17 Contains ANY of the following: -Some areas include awkward wording or phrasing. -Grammatical errors. -Did not follow recommended format.	15-0 Contains ANY of the following: -Difficult to read -Numerous grammatical errors

Hawaiian Memories, Inc. (HMI) is a C corporation that was formed in 2007 in Maui. The company markets specialty tourism products of the islands of Hawaii. The initial incorporators were Angie Lee and Bob Lin, who now own 1,000 shares of voting common stock and 100 shares of preferred stock each. The company has eight employees who collectively own 500 shares of nonvoting stock. Most of the employees have worked for the company for several years and purchased the stock when offered at the end of each year. Two own 100 shares each; the other six own 50 shares each.

All individual shareholders are native Hawaiians except for Inge; she is Swedish and has lived on Maui and worked for HMI for three years. Inge plans to move back to Sweden in one year and try to develop markets for HMI products there. Another stockholder is the Plantation Sugar Partnership (PSP). PSP owns 500 nonvoting common shares; it supplies raw sugar in bulk to HMI. Bob Lin and his sister Katie each own 50% of PSP.

The corporation uses a January 31 year-end. The year was chosen arbitrarily. All the HMI shareholders use calendar years. Financial statements for the year ended January 31, 2023, are attached. HMI does not expect that it will generate any significant increases in investment or passive activity income in the coming years.

This was the first year of corporate operating losses in some time. The corporation elected not to carry back the losses because the tax rate paid in those years was lower than they expect to pay in the future. Bob and Angie expect one or two more years of losses and then steady increases in net income.

Bob lives in Hawaii and manages operations there. Angie moved to San Francisco in 2012 to develop mainland markets for their products. Both earn annual salaries of $150,000. The shareholders and all employees are provided accident and health insurance. The company contributes 10% of each employee's salary to a defined contribution pension plan each year.

On March 5, 2023, Bob and Angie came to your office for the first time. They had just filed the corporate return for the fiscal year ended January 31, 2023, and are interested in having you take over all the future tax work for the corporation. They inform you that they have just read an article in Tourism Retailing about the tax and cash-flow benefits of pass-through losses. They have filed an election to be an S corporation, effective on February 1, 2023.

Bob and Angie signed the consent for the S election because they were the only shareholders with voting stock. Their reasoning for making the S election is that they expect losses for a year or two as they try to expand, and they would like to use the losses already incurred as well as prospective losses against their other income. Review all relevant information and identify any issues related to conversion to S status.

Prepare a tax memorandum to your tax manager, Maria Gonzalez that discusses all relevant issues. This memorandum will serve as the basis for the advice the firm will be giving Bob and Angie about the conversion to S status in your upcoming meeting.

Hawaiian Memories, Inc.

Book/Tax Balance Sheet

January 31, 2023

Accounts	Book/Tax Basis	Fair Market Value
Assets
Cash	$100,000	$100,000
Trade accounts receivable	250,000	250,000
Inventory*	450,000	500,000
Furniture & Fixtures	$300,000
Accumulated depreciation	(160,000)	140,000	100,000
Investment – Land	350,000	850,000
Total Assets	$1,290,000	$1,800,000
Liabilities and Stockholders’ Equity
Accounts Payable	$145,000
Note Payable, Hawaiian National Bank	200,000
Paid-in-Capital, Common	500,000
Paid-in-Capital, Preferred	100,000
Retained earnings	345,000
Total Liabilities and Stockholders’ Equity	$1,290,000

Notes:

The difference between FIFO and LIFO is expected to be approximately the same for the next year. The entire layer of inventory on hand at conversion will be sold by January 31, 2024

Memories’ balance in Earnings and Profits is $300,000. Current E&P for the year ended January 31, 2023, was $0.

Hawaiian Memories, Inc.

Book and Tax Income Statement

for the 12 months ending January 31, 2023

Revenue:
Sales		$1,650,000
Interest Income		10,000
Total Gross Income			$1,660,000
Expenses/Deductions
Cost of Goods Sold		$1,094,000
Salaries, Angie & Bob	$300,000
Salaries, other	200,000	500,000
Employment taxes		50,000
Rent expenses		36,000
Depreciation		40,000
Employee health care	$85,000
Contribution to employee retirement plans	45,000	130,000
Other operating expenses		55,000
Total Expenses			1,905,000
Net Income/(Loss)			($245,000)

Hawaiian Memories Inc

Plantation Sugar Partnership

500 non-voting common

Bob

50%

Katie

50%

Angie

1,000 voting common

100 preferred

Bob

1,000 voting common

100 preferred

Carl, Donna

100 non-voting common each

Ernie, Frank, Gertie, Hannah, Inge, Jerry

50 non-voting common each

Page 1 of 6

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Citation to Primary Authority

PRIMARY AUTHORITY	CITATION
Committee Report	House Committee on Ways and Means, H.Rep. No 432, 98th Cong., 2d Sess. (March 5, 1984).
Internal Revenue Code	Sec. 469 (e)(1)(A).
Treasury Regulation – final	Reg. Sec. 1.269-1(a)(3).
Treasury Regulation – proposed	Prop. Reg. Sec. 1.704-3(c).
Treasury Regulation – temporary	Temp. Reg. Sec. 1.441-1T(a)(2).
Revenue Ruling – temporary cite	Rev. Rul. 84-101, 1984-28 I.R.B. 5.
Revenue Ruling – permanent cite	Rev. Rul. 54-56, 1954-2 C.B. 108.
Revenue Procedure – temporary cite	Rev. Proc. 93-15, 1993-3 I.R.B. 12.
Revenue Procedure – Permanent cite	Rev. Proc. 88-12, 1988-1 C.B. 17.
Announcement – Temporary cite	Ann. 2011-77, 2001-30 I.R.B. 83.
Announcement – Permanent cite	Ann. 2001-77, 2001-2 C.B. 83.
Notice – Temporary citation	Notice 2002-64, 2002-41 I.R.B. 690.
Notice – Permanent citation	Notice 2002-64, 2002-2 C.B. 690.
Private Letter Ruling	LTR 8450056 (PLR) or LTR 200343030 (PLR)
U.S. Tax Court- regular decision	J.B. Linderman, 60 T.C. 609 (1973)
U.S. Tax Court – memorandum decision	Thomas E. Lesslie, 36 TCM 495 (1977), T.C. Memo ¶77,111.
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