ACCOUNTING

Hawaiian Memories, Inc. Tax Research Memorandum Due Date: Monday, April 16, 2018 at 11:59 pm

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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$tools$in$order$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$memoranda$can$be$found$at$the$M.$Tx.$Writing$ Website$located$at$M.$Tx.$Writing$Website.$$Format$the$memo$to$include:$

o Restatement$of$Facts$(paraphrase)$ o Identify$at$least$three$main$issues$based$on$these$facts$ o Provide$a$conclusion$for$each$issue$ o 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.$$$

o Primary$authority$would$include$items$such$as$the$Internal$Revenue$ Code,$Regulations,$Court$Cases,$etc.$$These$also$should$be$paraphrased$in$ order$to$highlight$your$understanding$of$the$primary$authority$and$how$it$ relates$specifically$to$the$issue.$ $

• Submit$the$assignment$using$a$Turnitin$assignment$dropbox.$$ o Turnitin,$is$an$online$resource$that$checks$your$work$against:$the$submissions$of$

others,$books,$articles,$tax$code,$etc.,$in$order$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.$$Should$you$resubmit$your$ paper,$the$originality$score$will$not$be$viewable$for$12>24$hours.$$$$

o I$use$the$information$supplied$by$TurnItIn$as$well$as$my$professional$judgment$to$ determine$the$originality$of$your$paper.!$

o As!a!general!rule,!however,!any!memo!receiving!a!Turnitin!score!higher!than!20825%!will! be!considered!plagiarized!and!earn!a!grade!of!0.!!I$will$accept$late$assignments$for$no$ more$than$48$hours$after$the$due$date,$with$a$20%$penalty.$

$

Hawaiian Memories, Inc. Tax Research Memorandum Due Date: Monday, April 16, 2018 at 11:59 pm

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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!of!the! following:! >All$issues$identified$and$ thoroughly$analyzed;$$ >Conclusion$and/or$ recommendation$ offered$

32′ Contains!ANY!of!the! following:! Identified$most$of$the$ relevant$issues.$ Conclusions$not$ offered$for$each$issue$ $

28′ Contains!ANY!of!the! following:! Several$relevant$issues$ not$addressed$ No$conclusions$offered$

‘ ‘

Complete9 ness’

20’points$

20′ Contains!ALL!of!the! following:! >Thorough$analysis$$ >Proper$primary$ authority$citation$used$ including$items$other$ than$code$sections.$

17′ Contains!ANY!of!the! following:! >Good$Analysis$most$ issues$addressed$$ >Most$issues$contain$ primary$authority$of$ Code$Sections.$

15′ Contains!ANY!of!the! following:! >Did$not$research$ important$issues;$$ >Incomplete$analysis;$> >Primary$authority$not$ cited$

‘ ‘

Readability” ’25’points$

25′ Contains!ALL!of!the! following:! >Well$written$easy$to$ follow$clearly$discusses$ issues;$$ >Followed$ recommended$format.$

22′ Contains!ANY!of!the! following:! >Some$areas$include$ awkward$wording$or$ phrasing;$ >Grammatical$errors;$ >Did$not$follow$ recommended$format.$

18’ Contains!ANY!of!the! following:! >Difficult$to$read$ >Numerous$ grammatical$errors$

$ $ $

Hawaiian Memories, Inc. Tax Research Memorandum Due Date: Monday, April 16, 2018 at 11:59 pm

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$ 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$a$June$30$year>end.$$The$year$was$chosen$arbitrarily.$$All$of$the$HMI$ shareholders$use$calendar$years.$$Financial$statements$for$the$year$ended$June$30,$2017$are$ attached.$$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$

Hawaiian’ Memories’Inc’

PlantaFon’Sugar’ Partnership’ 500$non>vo`ng$

common$

Bob’ 50%$

KaFe’ 50%$

Angie$ 1,000$vo`ng$common$

100$preferred’

Bob$ 1,000$vo`ng$common$

100$preferred’

Carl,’Donna$ 100$non>vo`ng$ common$each’

Ernie,’Frank,’GerFe,’ Hannah,’Inge,’Jerry$

50$non>vo`ng$ common$each’

Hawaiian Memories, Inc. Tax Research Memorandum Due Date: Monday, April 16, 2018 at 11:59 pm

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shareholders$and$all$employees$are$provided$accident$and$health$insurance.$$The$company$ contributes$10%$of$each$employee’s$salary$to$a$defined$contribution$pension$plan$each$year.$ $ $ On$October$1,$2017,$Bob$and$Angie$came$to$your$office$for$the$first$time.$$They$have$just$filed$ the$corporate$return$for$the$fiscal$year$ended$June$30,$2017$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$July$1,$2017.$$$ $ Bob$and$Angie$signed$the$consent$for$the$S$election$because$they$were$the$only$shareholders$ with$voting$stock.$$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$the$file$that$discusses$all$relevant$issues.$$This$memorandum$will$ serve$as$the$basis$for$the$advice$you$will$be$giving$Bob$and$Angie$about$the$conversion$to$S$ status$in$your$upcoming$meeting.$ $

Hawaiian Memories, Inc. Tax Research Memorandum Due Date: Monday, April 16, 2018 at 11:59 pm

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Hawaiian Memories, Inc. Book/Tax Balance Sheet

June 30, 2017

Book$/$Tax$ Basis

Fair$Market$ Value

Assets

Cash 100,000$)))))) 100,000$)))))) Trade)accounts)receivable 250,000)))))))) 250,000))))))))

FIFO$ cost/basis$ would$be $450,000$

Furniture)and)fixtures 300,000$))) Accumulated) depreciation (120,000))))) 180,000)))))))) 100,000))))))))

Investment)land 350,000)))))))) 850,000))))))))

Total 1,230,000$)) 1,800,000$))

Liabilities$and$Shareholders’$Equity

Accounts)payable 145,000$)))))) Note)payable,)Hawaiian) National)Bank 200,000))))))))

PaidLin)capital,)common 500,000$)))

PaidLin)capital,)preferred

Nonvoting,$ cumulative$ 8%,$callable$at$ 104%$of$face 100,000))))) 600,000))))))))

Retained)earnings 285,000))))))))

Total 1,230,000$))

500,000))))))))350,000))))))))Inventory)(LIFO)

$ $ Notes$ $ The$difference$between$FIFO$and$LIFO$is$expected$to$be$approximately$the$same$for$the$next$ year.$$The$entire$layer$of$inventory$on$hand$at$conversion$will$be$sold$by$December$31,$2018.$ $ Memories’$balance$in$Earnings$and$Profits$is$$300,000.$$Current$E&P$for$the$year$ended$June$30,$ 2018$was$$0.$

Hawaiian Memories, Inc. Tax Research Memorandum Due Date: Monday, April 16, 2018 at 11:59 pm

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Hawaiian Memories, Inc. Book and Tax Income Statement

for the 12 months ending June 30, 2017

Revenues’/’Gross’Income

Sales 1,650,000$, Interest,income 10,000,,,,,,,,, 1,660,000$,,,,,,,,

Expenses’/’Deductions

Cost,of,goods,sold 1,094,000$, Salaries,,Angie,and,Bob 300,000$,,,, Salaries,,other,employees 200,000,,,,,,, 500,000,,,,,,, Employment,taxes 50,000,,,,,,,,, Rent,expenses 36,000,,,,,,,,, Depreciation 40,000,,,,,,,,, Employee,health,care 85,000$,,,,,,, Contributions,to,employee, retirement,plans 45,000,,,,,,,,, 130,000,,,,,,, Other,operating,expenses 55,000,,,,,,,,, 1,905,000,,,,,,,,,,

Net’Loss (245,000)$,,,,,,,,,, $

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