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The Tax Research Memorandum Guidelines
This guidance focuses on a tax research memorandum (internal memo to the file). This memo is not typically shared with the client. Instead, it is included in the client’s file as a record of the research performed and the conclusions drawn. One of the key purposes of the memo is to provide a research trail in case the transaction is later questioned by the tax authority.
Tax research memos can take a variety of forms. There is no one correct way to construct the memo. Despite the variety of preferences, most memos contain the same basic information. In general, the memo format should organize the facts, issues, and research conclusions of the client situation in a way that allows others to easily review the content. A memo can be adapted as needed for each situation.
Here is one example of a memo format:
Format of Tax Research Memorandum
Facts: A summary of the relevant facts.
Issue(s): A list of the specific issues that were investigated. There may be multiple issues; however, if they are unrelated issues they should each be examined in a separate memo.
Conclusion: A short statement of the outcome of each issue.
Analysis: This section includes a summary of the pertinent sources of primary authority that were reviewed to arrive at the conclusions or recommendations.
In general, a review of a good memorandum should make it clear to the reader that the researcher completed a thorough analysis of the primary sources of authority. More specifically, this section should include an analysis of:
- The applicable code. Do NOT quote the code directly. Include the citation so the reader can look up the exact wording if necessary. This section is the author’s interpretation of what this code section means for the client’s specific
- The applicable Regulations – Again, no direct quotes, just an interpretation as it relates to the client’s
- Court cases/revenue rulings, etc. – Relevant court cases or rulings should be summarized and applied to the client
Summary: This section should include a more thorough summary of the conclusions/recommendations.
Here is additional information about each section of the memo:
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This section contains a brief summary of the relevant facts of the case. Do not include extraneous information that has no bearing on the outcome or conclusions reached.
Include a succinct statement of the issue(s) that the fact pattern raises. Be specific and use appropriate terminology. Each issue should be separately stated and perhaps numbered. Only include multiple issues if they are related. Unrelated issues should be in a separate memo. The issue(s) should be stated in the form of a question.
The purpose of this section is to give the reader a quick answer to each issue that is identified. Therefore, the conclusion is usually a one-sentence answer to the question(s) that was raised in the issues section. Typically, the reasoning for the conclusion is not included in this section, simply the conclusion itself.
This section includes a summary of the various sources of authority that relate to the identified issues. Many issues will require you to interpret specific aspects of the Internal Revenue Code (IRC). Because the IRC is considered to be the most important source of authority for federal income tax issues, the analysis section usually begins with an examination of this source of authority. The analysis of the IRC should include a discussion of how the IRC applies to the client’s situation. In many situations, the Code will not provide a specific answer to the client’s tax situation, so be careful to avoid over-analyzing the Code.
Likely, the Code section will merely provide a broad framework.
After the analysis of the IRC, you should include your analysis of the Regulations, if applicable and relevant. If there are related regulations, be sure to apply them directly to the client’s situation.
Lastly, the analysis should include a discussion of relevant rulings or court cases that address the taxpayer’s situation. Be clear on how this authority relates to the client’s situation. Additionally, be clear if there are any significant differences from the client’s facts.
Generally, you should only include a summary of primary sources of authority. References should not be made to the secondary sources of authority. Be sure to cite completely, correctly, and as specifically as possible (e.g., subsections or paragraphs) all other sources of authority.
This section typically is a more thorough version of the Conclusion section at the beginning of the memo. In this section, you provide a summary of the analysis that includes your rationale or reasoning as well as the final conclusion.
Accounting Example Research Final Assignment Details
Date: April 5, 2015
Preparer: Susan Smith
Client: Highland Golf Club
Subject: Greens Improvement Tax Treatment
As per conversation with Joe Smith at Highland Golf Club on April 1, the facts are as follows:
Highland Golf Club restructured their golf course’s greens after withstanding severe hurricane damage. The improvements included installing computer-controlled irrigation and drainage systems. The prior cost of constructing the golf course’s “natural” greens, without any dedicated irrigation system or other technology, was capitalized to the cost of the land and therefore has not been depreciated for either book or tax purposes.
How should Highland Golf Club account for the recent greens restructuring costs for tax purposes?
- Federal Tax Regulation 1.167(a)-2
- Rul. 2001-60, 2001-51 I.R.B. 587
- Rul. 55-290, 1955-1 C.B. 320
The irrigation and drainage systems installed by Highland Golf Club are technological improvements that will deteriorate over time. Therefore, they should be capitalized and depreciated as equipment and not capitalized as part of the cost of the land. The depreciation should be calculated using MACRS. Other costs associated with preparing and replacing the land itself should continue to be added to the cost of the land and will not be depreciated.
§167(a) allows for the deduction of depreciation that reflects the normal use of and wear and tear on a business’s property. §1.167(a)-2 distinguishes that §167 applies to land improvements but not to the cost of the land itself. Land has an unlimited useful life and is therefore not depreciated. Rev. Rul. 55-290 determined that the construction costs for golf course greens should be accounted for as land rather than as land improvements. However, this ruling does not address greens with an embedded technology.
Rev. Rul. 2001-60, which modified and superseded Rev. Rul. 55-290, distinguishes between two types of golf course greens: “natural” greens with no belowground technology and “modern” greens with belowground irrigation or drainage systems. Rev. Rul. 2001-60 indicates that natural greens should continue to be accounted for per Rev. Rul. 55-290 and therefore not be depreciated. In restructuring its greens and adding belowground irrigation and drainage systems, Highland Golf Club has installed modern greens and replaced their previously natural greens.
Rev. Rul. 2001-60 discusses the deterioration of the equipment associated with drainage systems used in modern greens (tiles, pipes, etc.) and goes on to define a 20-year useful life for these components of modern greens.
However, the costs of moving, grading, and shaping the soil to install the drainage system should continue to be added to the value of the land and not be depreciated, consistent with §1.167(a)-2 and Rev. Rul. 55-290.
Per §168(b)(1), Highland Golf Club should depreciate the drainage/irrigation equipment costs using MACRS (i.e., 200% declining-balance depreciation).
Reference ID No.: AH019002032