Federal Income Tax - Research Paper Example

Part Tax Research Research Manager Research Staff 11-10 Re: Client: Mr.Efran Zimblist The tax issues of Mr. Efran Zimblist have been identified. The main area of focus or the primary issue is that whether the employee Mr. Zimblist (provided housing) pays the tax or the company pays for it. The question arises that how Mr. Zimblist should be treated for the tax after such an investment. The Zimblists are a family of husband wife and three children. Mr. Zimblist is CEO at a small corporation, Infranet, Inc. The company has provided him with residence, along with accounts. The company has allotted him a house for his own personal use and to set an impression and a trend inorder to attract and entertain clients. Mr. Zimblist has a garage to house his auto collection. Mr. Zimblists wife is a motivational speaker who paid for advanced motivational psychology classes and earned a certification in it. The question arises that how Mr. Zimblist should be treated for the tax after such an investment. The total expenditure by Mr. Zimblist could be overviewed by his expenses like extending the garage area for vintage auto collection, donating a large amount to a university and collecting a professional certification by his wife. $45,000 has been invested for the garage area inorder to display the vintage auto collection which is debatable because 60% of it was paid by the company. Mr. Zimblist has donated an income of about $ 25000 to the university is on his behalf. Finally Mrs. Zimblist certification in advanced motivational psychology offered by the professional organization was worth $ 12,300, this includes the cost of the overall courses, books and materials. Efran lives in a house that is provided by the company. It is not only in his personal use but also the requirement of the company to set it as an office house inorder to comfort, entertain and leave a good impression on the clients. House maintenance and others are also taken care by the company. His garage serves the same business purpose. §162(a) states that the taxpayer is allowed to deduct the ordinary and necessary expenses paid in carrying a trade or business. In contrast §262 provides no deduction to be made for personal expenses. However, §162(a) (2) and §280A apply many restrictions on the expenses made on personal resident being used as office. § 280A(c)(1)(B) allows deduction for a home office if it is in use for patient, clients or customers and they make meeting and dealings. The Green v. Commissioner, 705 F. 2d 404 (9th Cir. 1983) also claims how important it is to understand the use of the resident as personal or office. Since 60% of the expense was made by the company it is important to highlight in reducing the tax amount to pay. It is also important to point that the home office should be a principal place of business like it is articulated in Commissioner v. Soliman, 506 U.S. 168 (1993). (Bank, Thomas and Griffith, 353-407). It is also questionable that auto collection done by Mr. Zimblist is a hobby or a requirement. This has to be determined in order to know whether the company is not paying for leisure pursuit. Mr. Zimblist’s vintage auto collection serves two purposes: it is the reason of increased curiosity and interest of the company clients and it makes comfortable and informal environment available which further is necessary for the complex business deals to be made as successful agreements. Hence, the company is benefitted in both ways i.e. it attracts customers and is also beneficial for the business and keeps the employee happy (as regarded a personal interest). It is extremely important to keep your client happy and contented with the job as they are the main asset of the business. If they are kept contented then they work at their best hence generating business and close ties for the company. But it is important to prove it an ordinary or necessary expense according to §162. If for example, an expensive aquarium is brought by a company to entertain its clients it would be considered as a necessary expense, but if it proves a personal like by the companys owner it would be considered as an unnecessary item and no deduction could be made on such products. So it is important just to prove it income related. For example, in Nickerson v. Commissioner, 700 F.2d 402 (7th Cir. 1983), the court stated that that it should be proved that the cause of activity is sincere rather than real. The close ties with a mate brought about money for Mr. Zimblist that was given as a gift to Mr. Efran by Hector to thank for the help. The main area of focus here is that it was an option for Mr. Zimblist that either he keeps it or donates it. Mr. Zimblist chose to donate it instead of keeping it and the law for taxation on donation allows deduction if the donation would not provide future benefits especially if the donation is made for educational or medical purposes. Since the donation was made to a University, it has the space for tax deduction. §170(b) (1) (A) (II) clearly debates the argument regarding donations made to an educational institution (Cordes, Ebel and Gravelle, pp.51). It is possible that it may fall in the category of business gift if it is not proved as a non profitable donation and a business gift income tax has the possibility to 25% deductions according to law. Mrs. Zimblist paid for a certification that added to her professional value. This certification was made by the organization she worked with as a motivational speaker. The amount paid is the educational cost according to 1.162-5 A(Raabe and Whittenburg et al., pp.162). $ 12,300 was paid for the certification as a legal fee. Since income would be generated as a result of this qualification, a deduction could be made in the taxation for the fee paid. The understanding of the deductions that can be made to minimize the amount of tax to be paid by the taxpayer is very important task. The taxation authorities do not provide any possible information about tax deduction. Every personal expense is to be paid through tax and the business and trade gets an advantage of tax deduction. That’s how an income is generated. It should be kept in mind that the expense with the income to which it relates should be matched each year for example Baitannica v. Commissioner, 685 F.2d 212 (7th Cir. 1982). According to it the business expenses made, should be capitalized. The taxation can be reduced to half if one is having personal residence on business expense as well. Mr. Efran uses the residence to live and entertain clients, so the residence should be termed as office home. There might be an objection that it is mandatory for a company to have an office therefore it should be considered as a something which makes taxation valid. Since Mr. Zimblist is using his residence for the meetings and office work as well, the case for tax deduction is strong. The collection of vintage autos may also be a termed as a personal interest but as they are used to entertain the clients therefore it should be termed as a ‘necessary business expense’. This in turn would reduce the taxation on both parties (Mankiw and Taylor, pp.125). Moreover, the construction to increase the garage area is used to accommodate the auto collection therefore it also falls in the category of necessary expense. Evidence for the donation been made to the university should be provided. The proof will help in the verification of the fact that no income was generation out of it (Bank, Thomas and Griffith, 121-200). Part. 2: Works Cited Bankman, J., Griffith, T., D., and Pratt, K. Federal income tax. Fifth Edition, Aspen publishers. 2008, pp. 353-407. Bankman, J., Griffith, T., D., and Pratt, K. Federal Income Tax: Examples & Explanations. Fifth Edition, Aspen publishers. 2008, pp. 121-200 Mankiw, N., G., Taylor, M., P. Economics, Cengage Learning EMEA. 2006, pp. 125. Raabe A., W., Whittenburg, G., E., et al. Federal Tax Research, 9th Edition, Cengage Learning. 2011, pp.123-162. Cordes, J., J., Ebel, R., D., Gravelle J. Encyclopedia of Taxation and Tax Policy. 2nd Edition, Urban Institute. 2005, pp.51. Read More