RESEARCH ASSIGNMENT 7
Professional & Trade Associations / â€œThink Tanksâ€ / Tax Blogs / Etc.
( Please submit as aÂ Word documentÂ by email byÂ 12 noonÂ on Thursday, 10/20. )
This assignment is worth up to a maximum ofÂ ten (10) pointsÂ â€“ two items each worth up to five points. Your work should be writtenÂ in your own wordsÂ without any â€œcutting & pastingâ€ from the source document(s) you cite except that very brief quotations are acceptable if properly attributed.
PointsÂ willÂ be deducted for, among other things, (i) spelling and grammatical er-rors that Word highlighted but you failed to correct and (ii) other egregious errors, including substantive misstatements.
Any submissions received after 12 noon will be worth up to six (6) points only (3 points per item). Submissions not received by 7:00 p.m. will not be scored (zero points).
* * * *
Item 1: IRS Draft Form 15307
There are any number of valuable secondary sources beyond tax journals. Many professional and trade associations have federal tax committees that are active in writing opinionated and analytical white papers on current tax issues and/or in submitting comments to Congress on pending legislation and to Treasury and the IRS on proposed regulations and administrative developments. In addition and importantly, many large accounting firms and law firms advertise their expertise with blogs or commentary on their websites discussing current tax â€œgoings on.â€ These are an incredibly rich source of up-to-the-minute tax expertise and almost all of it is freely available through the websites of these organizations.
AssignmentÂ : The premise here is that many or most of you will eventually will be working for large business taxpayers or for accounting firms with large business taxpayer clientsâ€¦
As we speak the IRS is on the verge of finalizing and releasing newÂ Form 15307 Post-Filing Disclosure for Specified Large Business Taxpayers. It likely will issue narrative guidance in one or more forms when it does finalize Form 15307, which may or may not be by the end of this year.
In February 2022 the IRS released a draft version of Form 15307 [posted] and invited public comment through early June. Sadly, we do not have access to any of the comments filed (we lack the necessary subscriptions).Â However, there is much commentary about this draft form just for the googling, including by law firms, accounting firms, and professional organizations (perhaps including one or more pictured on the preceding page).
You should familiarize yourself with the draft Form 15307 such that you under-stand its general purpose. You should pay attention to the instructions. You then should locate and study enough commentary â€“ much but not all of which will be dated 2022 â€“ to understand what concerns (or compliments) the professional community has expressed. Finally, you should summarize what you have learned in an essay of not less than 750 words (and not more than 1,000, please).
Item 2: Code Â§ 121 Exclusion of gain on sale of principal residence.
Some of you are aware of my view that Â§ 121 is the greatest middle-class â€œtax shelterâ€ currently available in the Code. (Letâ€™s hope that Congress never takes it away!)
This is a general research assignment, meaning that you should use whatever primary and secondary sources you believe are adequate in order to be able to deliver accurate tax advice to your clients. After you have arrived at your conclusion(s) you then should prepare a letter communicating that advice.
ScenarioÂ : Your clients are a young couple,Â Mary and Harry Client. In 2014 they paid $300,000 for their first home. They lived in that home until mid-2022. At that time they decided to convert it to rental property and did in fact lease it to a tenant coincident with their move-out (mid-2022). They will be reporting rental income and associated rental expenses, including depreciation, on their 2022 tax return and on future tax returns as long as they continue renting their former home.
By the time Mary and Harry moved out, their home had increased in value to $750,000. They hope and expect it to continue to increase in value. For the sake of simplicity, assume that it will increase in value at a rate of $50,000 per year for the indefinite future.
Mary and Harry moved out of their home due to a job relocation that forced them to leave the area. Their decision to keep rather than sell their home at that point was based on a combination of factors, including but not limited to the possibility of a return to their home at some (uncertain) point in the future.
Of course Mary and Harry are generally aware of the maximum $500,000 ex-clusion from gross income on the sale of a personal residence . . . because you keep your clients well informed! But they are unsure exactly how the â€œ2 years out of 5â€ rule applies, much less how other parts of the statute might apply to them. Thatâ€™s why theyâ€™ve asked you to research the matter and provide them definitive written advice.
Theyâ€™ve asked you a few questions, including these:
1. Is the full $500,000 exclusion still available to them if they limit their rental of their former home to a total of less than three years (e.g., 2 years, 10 months)? Available on the same basis as if they had sold their home in mid-2022 instead of renting it out?
2. If they rented their home for more than three years â€“ say, four â€“ and then moved back in themselves, would they have to remain for two years be-fore they could sell with a maximum exclusion? Or does their former use of the home as their principal residence â€œtack onâ€ to their new â€œuseâ€ period?
3. Is there any alternative (slower) depreciation method that they might consider â€“ i.e., other than the standard 27.5 year straightline method for residential rental property? If there is, which method do you recommend that they use, beginning with their 2022 return?
4. What are they overlooking? Is there anything else that they need to be thinking about as they plan their continuing ownership of their former home?
Donâ€™t assume that the Clients have asked you every question they should have asked â€“ youâ€™re the expert, not them.
Your letter to Mr. & Mrs. Client should be as brief or as lengthy as you believe appropriate. You should communicate with them as intelligent people who do not happen to be tax professionals (like you). Above all, you should give them advice that is accurate.
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