Business Finance
SDSU Food Banks and Other Charitable Organizations Tax Research Memorandum

San Diego State University

Question Description

I don’t know how to handle this Accounting question and need guidance.

Doing a tax memo for accounting class and I attached examples.

I blind mark the tax memo so please only include your RED ID for the author of the memo. If you really want to use a name then please use "Jane Smith" irrespective of whether you are male or female.

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Mimi’s Grocery Chain of Stores, Inc. (“Mimi’s Grocery Chain of Stores”) is a C corporation. Mimi’s Grocery Chain of Stores is a calendar year taxpayer. Mimi’s Grocery Chain of Stores operates a chain of grocery stores. Mimi’s Grocery Chain of Stores is very profitable, especially during the pandemic. However, senior leadership recognizes that many customers in the areas where they operate have lost their jobs and/or suffered a loss of income. Mimi’s Grocery Chain of Stores has decided to donate food to local organizations to assist people who are suffering from food scarcity. The local organizations are tax exempt organizations and are food banks. The food to be donated is all within the expiry dates of the food items and consist of fresh fruit and vegetables, canned goods (some canned goods my be dented cans) and baked goods. All the food to be donated would be edible food. Mimi’s Grocery Chain of Stores would like to understand the amount of the income tax deduction that may be allowed for these donations (in tax parlance these are often referred to as charitable contributions). Mimi’s Grocery Chain of Stores has not provided the basis and fair market value of the goods so you may want to explain the difference where the basis is $100 and FMV is $110 vs basis is $100 and FMV is $210. You can safely assume the donations for the year will exceed $500,000. When researching you may want to consider the following (and please note this is not an exhaustive list just a guide to help you get started): IRC §170(e)(3) Regs. Sec. §1.170-4A Lucky Stores, Inc. 105 T.C. 420 (1995) Your responsibility: Prepare a tax research memo addressing the question that has been raised. Please note that if the tax memo is not in the required format and/or contains very little analysis you will receive a zero (0) for the assignment. All good faith efforts are capable of receiving a minimum of 60% but less than a good faith effort will be awarded zero points. You will need to support your conclusion using primary sources of tax law. Your textbook is NOT primary authority nor are IRS Publications You must use proper citation form in your memo (see Chapter 2 for help with citation form). The form for this communication should be professional and in the form of a tax research memo (example posted on Blackboard and a similar example in your textbook). Do yourself a favor and look at the grading rubric before you submit. This memo should be whatever length you feel is appropriate to resolve the issues. We do NOT use a bibliography or list of references in a tax research memo. You will see that citations are within the text of the document in the example. Once a court case has been cited in full, it can be referred to using. . Background: Your Texas Band, Inc., is a calendar year corporation. The corporation is a Texas corporation that is based in Dallas, Texas. The band recently sold tickets ($1,000,000) for concerts scheduled in the United States for next year and the following year. For financial statement purposes, Your Texas Band will recognize the income from the ticket sales when it performs the concerts. For tax purposes, the corporation uses the accrual method and would prefer to defer the income from the ticket sales until after the concerts are performed. This is the first time that it has sold tickets one or two years in advance. Their manager, Russell Crowe has asked your advice. Write a memo to Mr. Crowe explaining your findings. Facts: • • • • • • • Your Texas Band, Inc., is a calendar year corporation The corporation is a Texas corporation The band is based in Dallas, Texas The band recently sold tickets ($1,000,000) for concerts scheduled in the United States for next year and the following year. For financial statement purposes, Your Texas Band will recognize the income from the ticket sales when it performs the concerts. For income tax purposes, the corporation uses the accrual method. The band has never previously sold tickets one or two years in advance. Issue: Should Your Texas Band include the income from the advance sales of tickets for concerts scheduled in future years? Relevant Authorities: IRC Sections 451 and 446 Rev. Proc. 2004-34, 2004-1 CB 991. Artnell Co. v. Comm. (7 Cir., 1968), 68-2 USTC par. 9593, rev’g and rem’g 48 TC 411 (1967). Tampa Bay Devil Rays, Ltd., 84 TCM 394 (2002). Schlude v. Comm. (S. Ct., 1963), 63-1 USTC par. 9284, aff’g, rev’g and rem’g (8 Cir., 1962), 62-1 USTC par. 9137, aff’g 32 TC 1271 (1959). American Automobile Association v. U.S. (367 US 687), 61-2 USTC par. 9517, aff’g (Ct. Cl., 1960), 601 USTC par. 9301. Auto. Club of Michigan v. Comm. (353 US 180), 57-1 USTC par. 9593, aff’g (6 Cir., 1956), 56-1 USTC par. 9296, aff’g 20 TC 1033 (1953). Conclusion: Your Texas Band can defer recognition income form the ticket sales until the amounts are earned (i.e., until the concerts are performed). Thus, the ticket sale income for the concerts will be recognized in the year of the performance. Analysis: The general rule for prepaid service income is to recognize it in the year of receipt. However, Rev. Proc. 2004-34 allows a one-year deferral for prepaid services. Nonetheless, there is judicial authority (Artnell Co. and Tampa Bay Devil Rays, Ltd.) that indicates that deferring the income until actual performance more clearly reflects income in this particular setting. The key fact here is that the taxpayer knows exactly when the performance will take place. If, for example, the prepaid services were for "services on demand" like dance lessons, consulting services, etc., the most advantageous tax treatment would be a one-year deferral under Rev. Proc. 2004-34. There should be detailed analysis for each authority to continue the Analysis. Current date To: Client file ______________________________________________________________________________ Facts 1. The name of the US client is MacKenzie, Inc. (“MI”) 2. The JV partner is a Turkish company, Turk Contracting and Trading Company (“TurkCompany”) 3. The joint venture vehicle is a Nevada (“NV”) LLC, named MacKenzie-Turk Construction LLC (“MT LLC”) 4. The joint venture will be entering into a contract with the customer, a Cayman company with an Iraqi operation 5. The contract is a fixed price contract with the customer 6. Each JV partner has estimated the costs for their portion of the contract, assume $4 million for Turk-Company, and $1 million for MI 7. MT LLC will be charged the fixed price from each JV partner, and together with the direct costs incurred by MT LLC, a margin will be added to all the costs, resulting in a price for the fixed price contract with the customer 8. In order to ensure each JV partner is responsible for managing the respective costs for which they have quoted and are responsible it is preferable not to co-mingle the costs of the two partners. In essence, each partner is providing a service to the JV to fulfill the contract requirements 9. In addition to the Iraqi branch registration for MT LLC, each JV partner intends to register an Iraqi branch for their respective parts of the proposed operation to fulfill the contract obligations 10. The customer will likely withhold 7% from the gross payment to MT LLC. 11. Turk-Company will be doing the building and installation 1 12. MI will be providing project management, QC, EH&S, cost scheduling, interface with the customer in Iraq, interface with the customer in the US (approx. 10% of the work performed by MI will be done in the US). Issues 1. Can the activities of a partner be attributed to the partnership? 2. Is it possible to utilize the Turkey-US tax treaty to avoid a Permanent Establishment (“PE”) in the US for Turk-Company? 3. Is it possible to form a non-US partnership between the two partners to undertake the foreign activities and have no services performed in the USA so that there is no little or no US ECTI? 4. What if the amounts to be paid to both partners in MT LLC are structured as guaranteed payments? 5. If the payments for services to both partners are structured as guaranteed payments are there specific recommendations in regard to the guaranteed payments? Conclusions 1) It is likely the activities of MI would be attributed to MT LLC, and thus Turk-Company would have a US trade or business, and thus US ECTI and the associated § 1446 withholding. 2) There are court cases that would suggest that the Turk-Company would have a PE in the US from the activities of the partnership, MT LLC, and thus the income would likely be US ECTI with the associated § 1446 withholding. 3) The formation of a non-US partnership with a US partner, MI, would likely still result in the same result of US ECTI and associated § 1446 withholding. 4) If the payments for the services provided by both members of MT LLC are structured as guaranteed payments, then arguably the payment to the foreign partner, Turk-Company is not US ECTI and is not subject to § 1446 withholding. 5) If guaranteed payments are to be utilized with respect to payments made to the foreign partner for services performed for the partnership, it is recommended that there be a written 2 agreement, including: identifying the nature of the services; the place where the services will be performed; and the fact that any payments are not dependent on partnership income Analysis Can the activities of a partner be attributed to the partnership? Generally a partner can act on behalf of the partnership, as well as deal with the partnership in a separate contracting capacity1. IRC § 875(1) does not distinguish between general and limited partners, and when considering whether the activities of the partner can be attributed to the partnership this may be an important factor, such that, the activities of a general partner, generally possessing the authority to bind the partnership, would seem to be more easily imputed to the partnership than those of a limited partner (who runs the risk of losing his limited liability protection if he actively participates in the management of the partnership's affairs). As the partnership is a Limited Liability Company, as MI is the managing partner, it is likely that activities of MI would be attributed to MT LLC. Further, in the case U.S. v. Balanovski2, it was held that Balanovski's activities were imputed to the partnership, and accordingly the partnership (in which he was an 80% partner) was engaged in a U.S. trade or business (and thus the 20% foreign partner was engaged in a trade or business pursuant to § 875(1)). Specifically, Balanovski (i) made important partnership decisions in the U.S., (ii) maintained a bank account for the partnership in the U.S., and (iii) operated out of the partnership's New York office (a hotel room), and those facts all suggested that Balanovski was acting on behalf of the partnership and not for his own account. Thus, there is precedent that the activities can be attributed to the partnership. Accordingly, it is likely the activities of MI would be attributed to MT LLC, and thus TurkCompany would have a US trade or business, and thus US ECTI and the associated § 1446 withholding. Is it possible to utilize the Turkey-USA tax treaty to avoid a Permanent Establishment (“PE”) in the US for Turk-Company? As a general rule, under a tax treaty, a foreign person engaged in a trade or business activity in the U.S. will only be taxable on “business profits” generated from that to the extent the foreign person has a PE in the USA to which the profits are “attributable.” The taxation of trade or business income under the Code is generally a lower taxable threshold than the taxable threshold 1 2 Refer to § 707 236 F.2d 298 (2d Cir. 1956), rev'g on this issue 131 F. Supp. 898 (S.D.N.Y. 1955), cert. denied, 352 U.S. 968 (1956). 3 for a PE, and may be supplanted by treatment of the income under an applicable treaty to the extent the treaty is invoked by the taxpayer. The US requires the taxpayer to file a disclosure that they are electing treaty benefits. Although most treaties do not specifically address the issue of the foreign partner having a PE, the Service has taken the position that the imputation rule of § 875(1) also applies for purposes of determining a partner's permanent establishment status3. Several U.S. court cases have also considered the issue and held in accordance with the Service's position4. Accordingly, it is likely Turk-Company would have a PE in the US from the activities of the partnership, MT LLC, and thus the income would be US ECTI with the associated § 1446 withholding. Is it possible to form a non-US partnership between the two partners to undertake the foreign activities and have no services performed in the USA so that there is no US ECTI? In Rev. Rul. 2004-35, the IRS considered the application of § 875(1) to a service partnership that had been formed under German law and had two equal partners, one a U.S. resident and one a German resident. The German resident partner performed no service in the United States. The IRS ruled, pursuant to provisions of § 875(1), and the decisions in Donroy and Unger, that the German resident partner should be treated as having a fixed base regularly available to him in the United States and was therefore subject to U.S. taxation on his allocable share of income from the German service partnership to the extent that such income was attributable to the partnership's fixed base in the United States. This result was reached without regard to whether the German resident partner performed any services in the United States. Accordingly, establishing a foreign partnership, instead of MT LLC, to undertake the proposed Iraqi contract would not provide a different result. The foreign partnership would be seen as having an office in the US by virtue of the US office of MI, and thus there would be US ECTI and associated § 1446 withholding. What if the amounts to be paid to both partners in MT LLC are structured as guaranteed payments? In listening to the description of the facts of the proposed contract and the business arrangement, it appears that both members of MT LLC are providing services to MT LLC in regard to their respective areas of expertise. Further, the expected profit margins differ for each service. An 3 See Rev. Rul. 90-80, 1990-2 C.B. 170; Rev. Rul. 85-60, 1985-1 C.B. 187 Donroy Ltd. v. U.S., 301 F.2d 200, (9th Cir. 1962); Unger v. Comr., T.C. Memo 1990-15, aff'd, 936 F.2d 1316 (D.C. Cir. 1991). 5 2004-7 I.R.B. 486 4 4 overriding business requirement is that each partner is independently responsible for the performance of their portion of the contract – risk and reward is on the partner, not the partnership. The amount that can be charged to MT LLC is limited to the amount that was used for the original bid proposal. The US partnership rules adopt the entity model with respect to transactions in which a partner is acting at arms-length with the partnership6, and treats the transactions as if occurring between the partnership and a third party. Thus, if a partner performs services for a partnership to which the partner belongs, the partner will include any payment in income based on the partner's method of accounting, and the partnership will deduct or capitalize the payment under its method of accounting. Such payments are generally described as a guarantee payment. Guaranteed payments are similar in some respects to the distributive share payments (in that the partner is acting in his or her capacity as a partner), but also share some of the characteristics of § 707(a) payments (in that the partner's receipt of such payment is not dependent on the income of the partnership). As provided in § 707(c) and the regulations thereunder, guaranteed payments are fixed payments by a partnership for services (where such payment is not dependent on partnership income). If a guaranteed payment to a foreign partner is characterized as a payment for services, and if those services are performed outside the United States (and not in connection with a U.S. trade or business), then arguable that income is likely to constitute foreign source income and, accordingly, it would not be subject to U.S. taxation7. It should be noted there is some language that may cause some concern in that § 707(c) and the associated regulations may appear to limit this separate treatment8. There is no direct IRS or case authority addressing treatment of guaranteed payments to a foreign partner for purposes of § 871. However, for purposes of the foreign earned income exclusion of § 911, both the Tax Court9 and the Court of Claims10 have held that guaranteed payments from a partnership to a foreign partner for services performed by the partner are excludable from gross income as foreign source compensation. 6 Refer to § 707(a) Refer to § 862(a)(3) 8 Specifically § 61(a) (relating to gross income) and § 162(a) (relating to trade or business expenses) would be treated as separate payments, and for other purposes of the tax rules, guaranteed payments are regarded as a partner's distributive share of ordinary income 9 Miller v. Comr., 52 T.C. 752 (1969), acq., 1972-2 C.B. 2. 10 Carey v. U.S., 427 F.2d 763 (Ct. Cl. 1970). 7 5 In Carey11, the Court of Claims stressed (as the Tax Court had in Miller12) that failure to treat the guaranteed payment as compensation for purposes of § 911 would unfairly discriminate between a partner who performed services for the partnership outside the U.S. and an employee who performed services for the partnership outside the U.S. Both Courts also found that denial of the § 911 treatment for the service provider who also happened to be a partner in the partnership was inconsistent with the policy underlying § 707(c)1314. So although the tax cases and other authorities are in regard to the treatment of guaranteed payments is in relation to § 911, and not in relation to § 871, it does not appear unreasonable to apply the same reasoning that similar payments to a foreign partner would be foreign source compensation income for purposes of § 87115. If the payments for services to both partners are structured as guaranteed payments are there specific recommendations in regard to the guaranteed payments? If guaranteed payments are to be utilized with respect to payments made to the foreign partner for services performed for the partnership, it is recommended that there be a written agreement, including the following items: • • • identifying the nature of the services, the place where the services will be performed; and the fact that any payments are not dependent on partnership income 11 Carey v. U.S., 427 F.2d 763 (Ct. Cl. 1970). Miller v. Comr., 52 T.C. 752 (1969), acq., 1972-2 C.B. 2. 13 The Tax Court noted that the legislative history suggested that the words “but only” under § 707(c) were intended to make clear that guaranteed payments are not treated as compensation for purposes of determining when such payments are included in income but instead are included in income at the same time as the partner's distributive share 14 In TAM 7939005, the IRS followed Miller and Carey and, in reaching its conclusion, the IRS also acknowledged that § 861(a)(3) (and Regs. § 1.861-4(a)(1)) applied for purposes of sourcing the compensation income. 15 The same discriminatory treatment that the Courts objected to in the § 911 context would appear to exist if guaranteed payments were not treated as compensation for purposes of § 871. 12 6 Below expectations Meets expectations Exceeds Expectations Facts and Issues Critical facts omitted or substantial unessential facts included. Unable to apply or distinguish from other possible fact patterns or facts are merely copied from case. Most critical facts identified and communicated. Some unessential facts included. All pertinent facts ...
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Final Answer

Attached.

Tax Research Memo
Date:
To:
From: RED ID
Facts
1. The US client is Mimi’s Grocery Chain of Stores, Inc.
2. The company wishes to donate food products to charitable organizations and food banks
to assist customers facing food scarcity.
3. The company would like to know how much income tax exemption will be allowed for
such charitable contributions.
4. The food products donated by the client are all within the expiry date and have been
stored on the company’s shelves prior to being given out.
5. The total food donations would be valued at a minimum of $500000 annually.
Issues
1. Could the company expect any...

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Cornell University

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