Fluent Essays

Hi I need a tax memo assignment due by tonight. I will pay and tip good. I will give you my blackboard information so you can see how to do everything. I have provided examples down below. gill_example_memo.pdf example_memo.pdf Unformatted Attachment Preview Example Case: Ozzie and Sherrie Johnson lived in Bishop, California. The Johnson’s 15 year old son, Jack, suffered from illegal drug addiction and experienced both physical problems associated with the addiction and also behavioral problems. In 2012, without the consultation of a psychiatrist or psychologist, the Johnson’s sent Jack to a therapeutic boarding school, the Lonely Bridge School, in Idaho. Lonely Bridge was well known as a school where celebrities and the wealthy could send their “troubled” teens for 365 days a year for therapy and a high school education and had a strong reputation nationally. The Johnson’s paid tuition of $48,000 in 2012, incurred $12,000 in travel costs (airfare, rental cars, and lodging) to attend required parent therapy sessions at the school. They also deposited and spent $3,000 in a “personal account” used to cover expenses associated with therapy and was required to maintain matriculation at Lonely Bridge. Jack spent most of 2012 and 2013 at Lonely Bridge before running away in late 2013. Although no longer suffering physical addiction, his behavioral issues remain today. In 2014, it was discovered that some of the staff at Lonely Bridge, although therapists, were not credentialed as had been previously thought and that the school was not accredited as parents had been led to believe. In addition, a number of high profile “incidents” at the school that alleged unusual therapy methods and abuse forced Lonely Bridge to close in 2014. Prepare a tax research memo for your files regarding whether the Johnson’s can deduct the tuition, travel costs and personal account expenses for tax purposes as a medical deduction (in excess of the floor)? To: Files From: Student Date: Today’s date Subject Deduction for Tuition and Travel for Special Boarding School Facts: Ozzie and Sherrie Johnson enrolled their son Jack in Lonely Bridge, a special school for troubled teens where therapy is provided. In 2012, the Johnson’s paid tuition of $48,000. In addition, in order to attend mandatory parent therapy sessions at the school, the Johnson’s incurred travel costs associated with airfare, rental cars and lodging of $12,000 in 2013. Lastly, the Johnson’s were required to keep a personal account at the school to cover expenses associated with therapy. During Jack’s tenure at Lonely Bridge, the Johnson’s were under the impression that the program at Lonely Bridge was an accredited program for education and drug-addiction related therapy. Issue: Can the Johnson’s deduct the cost of tuition, travel and the personal account as medical expenses? Analysis: The deduction for medical expenses is covered by§213 which permits a deduction for expenses paid for medical care for the taxpayer, spouse or dependents. Under §213(d)(1), medical care is defined as amounts paid for “the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body [and] for transportation primarily for and essential to medical care.” Under §213(d)(2), “amounts paid for lodging while away from home primarily for and essential to medical care” if “the medical care referred to…is provided by a physician in a licensed hospital (or in a medical care facility which is related to, or the equivalent of, a licensed hospital) shall be deductible as medical costs,” but limited to $50 per person per night. Reg. §1.213-1(e)(1)(ii) states that “an expenditure which is merely beneficial to the general health of an individual, such as an expenditure for a vacation, is not an expenditure for medical care.” Furthermore, in Reg. §1,213-1(e)(1)(v), the issue of a deduction for the costs of having an individual in an institution because of his condition are considered by the Treasury. The regulation states that the expenses for care in an institution which is regularly engaged in providing medical care or services are deductible; however, the regulations also state that “where an individual is in an institution, and his conditions is such that the availability of medical care in such institution is not a principal reason for his presence there, only the part of the cost of care in the institution as is attributable to medical care.” Regs. §1.213-1(e)(1)(v)(a)) further states: While ordinary education is not medical care, the cost of medical care includes the cost of attending a special school for a mentally or physically handicapped individual, if his condition is such that the resources of the institution for alleviating such mental or physical handicap are a principal reason for his presence there. and In such a case, the cost of attending such a special school will include the cost of meals and lodging, if supplied, and the cost of ordinary education furnished which is incidental to the special services furnished by the school. Thus, the cost of medical care includes the cost of attending a special school designed to compensate for or overcome a physical handicap, in order to qualify the individual for future normal education or for normal living, such as a school for the teaching of braille or lip reading. Similarly, the cost of care and supervision, or of treatment and training, of a mentally retarded or physically handicapped individual at an institution is within the meaning of the term medical care. Two related revenue rulings have been issued on the topic of institutional care for drugs and alcohol. Rev. Rul. 72-226 states that “amounts actually paid by the taxpayer to maintain his dependent in a therapeutic center for drug addicts including the cost of the dependent’s meals and lodging at the center which were furnished as a necessary incident to his treatment, are expenses for medical care.” Rev. Rul. 73-325 holds that “amounts paid by the taxpayer to the therapeutic center for alcoholism, including the cost of the taxpayer’s meals and lodging at the center which are furnished as a necessary incident to his treatment, are expenses for medical care.” Rev. Rul. 63-91 states that, amounts paid for medical services rendered by practitioners, such as chiropractors, psychotherapists, and others rendering similar type services, constitute expenses for “medical care”…even though the practitioners who perform the services are not required by law to be, or are not (even though required by law) licensed, certified, or otherwise qualified to perform such services. The ruling also cites Wendell (12 TC 161, 1949) in stating that “the determination of what is medical care depends on the nature of the services rendered, not on the experience, qualifications, or title of the person rendering them.” Rev. Rul. 63-91 also states The Code and the regulations do not require a taxpayer to ascertain whether a practitioner is qualified, is authorized under state law, or is licensed to practice, before obtaining his services or claiming a medical expense deduction. Where it can be shown that an individual paid an amount for a purpose defined in the Code as “medical care,” such amount qualifies as a medical expense. In a 1992 Tax Court case, Urbauer (63 TCM 2492, 1992), the court held that the taxpayers could, deduct amounts spent in connection with the treatment of their son for behavioral and drug problems at a college-preparatory school that addressed the educational and emotional needs of its students. Since the son attended the school principally to benefit from its medical program and the costs of his education were incidental to the special services provided by the school, his enrollment costs were deductible as medical expenses. In addition, the court held that since his personal account was tantamount to his continued attendance at the institution, those expenses were also deductible. However, the court also held in Urbauer that the cost of lodging was not deductible since the travel was for care that was not provided by a physician in a licensed hospital as required under §213(d)(2). Conclusion: In the Johnson’s case, the tuition for John at Lonely Bridge meets the standard to be treated as “medical care” under §213. The definition of medical care under Reg. 1.213-1 as including John’s therapy at Lonely Bridge is also supported by Rev. Rul. 72-226 and Rev. Rul. 73-325. Lastly, the facts in Urbauer closely resemble the facts in the instant case, making it difficult to distinguish between the two. Under Rev. Rul. 63-91, it does not appear relevant that Lonely Bridge was not acting in good faith with respect to qualifications or credentials. The Johnson’s travel costs are deductible under §213, however, any part of the travel costs related to lodging are not deductible by the Johnson’s as Reg. 1.213-1 and Urbauer make it clear that such costs are not associated with services provided by a physician in a licensed hospital. Lastly, the court in Urbauer held that the personal account expenses are deductible due to the close association those costs have with the rendering of medical services at the school. 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 partnerships 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 Balanovskis 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 partnerships 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), revg 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 partners permanent establishment status3. Several U.S. court cases have also considered the issue and held in accordance with the Services 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 partnerships 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, affd, 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 partners 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 partners 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 C ... Purchase answer to see full attachment