Letter of Advice for Sam and Mary - Case Study Example

Name: Professor: Institution: Course: Date: Tax Law Write a letter of advice for your clients, Sam and Mary, which identifies all relevant tax issues, critically analyses and applies the taxation treatment to the issues, you will need to argue and support your view and consider differing views (if applicable), and finally, indicate your recommended action based on your view. Specifically: Sam and Mary being partners in the business ought to know how to compute and account for any transaction process going on in the partnership business since they might be operating on a loss without any knowledge. The following information on treatment of diverse items on the financial may lay a platform for them in knowing how their operation commences and the way to treat items. Treatment of receipts Receipts in a business perspective are those items which are mainly involved in increasing the income in the business. Out rightly, they may be termed as income to the business (Ernst & Young, 2003). Some of the receipts include the sales of travel goods; this will be treated as the business income since the business carries out the business of selling travel goods. Interest on bank deposits will be treated as non-business income since the income received does not evolve from what the business does but instead it’s from other sources, some other non-business incomes comprise of the capital gains from the sale of shares, the exempt income, the interest on capital , interest on loan and the lump compensation from the Adidas agency. Case law should be discussed for items marked with an asterisk. Interest on capital, capital gains Case law - Iowa law (Iowa Code §422.7 (21), this case provides that certain capital gains might be excluded from the taxable income depending on varying reasons. For instance, for the sale of a business property to be termed as eligible, an individual must be either have been employed by the business or worked in the business for a couple of more than 10 years (Brigham & Erhardt, 2010). The law has been reviewed from time to time but the sale of business still holds. A key aspect in this case law is whether the sale of partnership interest is included in the “sale of the business”. In this case, the plaintiff was a CPA and was in a two – person partnership. In 1989, the partnership merged with another firm, and the two partners also became members in the merged firm. Sometimes later the merging was cancelled due to failures from the acquiring firm and the partnership interests were transferred back to the two partners. The plaintiff sold half of his interest in the partnership to another partner who continued as a sole proprietor. The other partner continued with the business and paid up for the interest in the annual statements from 1992- 2000. This therefore generated some capital gain to the plaintiff and therefore claimed some exclusion for the years 1992-2002. The exclusion was denied and instead additional taxes, interest and penalties were to be assessed. It was held that, the statute could only apply to the sale of all or the considerably all of the tangible personal property but not for the sale of the partnership interest. It was also held that the capital gains that are incurred from the sale of an ownership interest in a partnership, or from other entities are ineligible for the exclusion. Liability of partners- case law Dubai Aluminium Company Ltd v Salaam and Others [1998] TLR 543 In this case, the chief executive officer of the plaintiff company had conspired with salaam and his solicitor, Amhurst to steal $ 50 from the plaintiff by using a series of deception contracts (Brigham & Erhardt, 2010). Amhurst was therefore sued for having a conspiracy with the chief executive to breach his fiduciary duty. The issue in the court was whether if the Amhurst partners were also liable for their partners’ action under section 10 of the partnership Act 1890. Section 10 provides that “[w]here, by any wrongful act or omission of any partner acting in the ordinary course of business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitting to act” (Chetty & National Bureau of Economic Research, 2008). In this case it was held that Amhurst could only be liable for the dishonest assistance and thus an action for contribution. Considering the above case therefore would compel the organisation to pay up for the money stolen from the company if it will be held that there was no conspiracy between the partners and the employees. Treatments of payments Payments are the money deducted from the business mainly for the purpose of purchasing some items for the business. Payments may also be termed as expenses in the business perspective and the term become effective when calculating taxable income of a firm (Brunori, 2000). Some of the payments made include, the fringe benefit tax – any kind of tax in business is termed as disallowable and is added back to the net profit or net loss to increase it since the item had been deducted during the first time and thus needs to be ploughed back to the business. Interest on capital is the amount of money the business pays out from its own sources, while the interest on loan includes the amount of money the business parts with in order to pay off its incurred interests on the loans advanced to it. Sam’s travelling expenses will also be termed as payments or the disallowable expenses since he is the one who decides to work from his house and therefore the business is not liable for the expenses he suffers even though it is meant for the welfare of the business. The bad debts are considered as the expenses for the business since the business will be accountable for the debts. The legal expenses ate also considered as the payments or the expenses for the company In this case, the legal expenses considered include those used for in purchasing new office buildings and the legal fess for new lease for the new premises (Powell & Steinberg, 2006). The both legal fess are termed as disallowable since they are capital in nature and therefore will only affect the capital the capital invested in the business. The council rates and the staff salaries will also be computed under the payments or the disallowable expenses. In this case the salaries include those of the partners’ salaries since the business does not pay the partner s any salary as this may not be logical. It’s not logical for one to pay him/her salary, since the business and the partners are one and the same thing. The legal fees on the partnership agreement are termed as an allowable expense considering the agreement was for the purpose of the business. Show legislation, calculations, including the adjustable value, for any assets. Calculating the fringe benefits 16,000 Fringe benefits tax (includes FBT on staff lunches) The fringe benefit will therefore be (16,000 – 10,000) = $ 6000- this is the amount that will be computed for the purpose of taxation. After the taxable income is calculated, the partners are required to share the profits out of the net taxable income (Brigham& Erhardt 2006). First, share the net taxable income on an equal basis since that is the proforma in the business. After sharing the net taxable income between the two partners, Sam having a interest in the capital for the partnership business at the same time having an interest on the loan he had taken, would mean that the amount should be appropriated in his share out of the net taxable income. The partnership salaries should also be computed or deduced out of this amount. The same is done to Mary and the remaining amount after all the deductions are effected in the share of each partner. Calculating Taxable Income Net partnership loss of as the year ended 30/6/09 $40,000 Add back disallowable expenses Fringe benefit 6000 Interest on capital 2000 Interest on loan 4000 Sam’s travelling expenses 3000 Bad debts 30,000 Legal expenses a) New office building 2000 b) New lease of b/s premises 700 Debt collection expenses 500 Council rates 500 Staff salaries 25,000 Commercial rate 5,000 Partners salaries: Sam 10,000 Mary 15,000 113,700 153,700 Less non- business income Interest on bank deposits 10,000 Capital gain from shares 15,000 Exempt income 50,000 Interest on capital 2,000 Interest on loan 4,000 Compensation 26,400 Total non- b/s income 107, 400 NET TAXABLE INCOME 46,300 Share between Sam and Mary on equal basis (46300) Sam - 23,150 Less Salary to Sam (10,000) Interest on capital (4000) Interest on loan (2000) Share to Sam 7,150 Mary - 23,150 Salary 15,000 8,150 References Brunori, D. (2000).The future of state taxation, Must corporate income be taxed twice?: A report of a conference sponsored by the Fund for Public Research and the Brookings Institution. McLure, C. (1997). Chicago: Brookings Institution Press. Volume 10 of Studies of government finance, Brookings Institution National Committee on Government Finance Clyde P. Stickney, Roman L. Weil, Katherine Schipper. (2009).Financial accounting: An Introduction to Concepts, Methods and Uses, Edition13, New York: Engage Learning. Wiley CPA exam review, 2007-2008: Outlines and study guides, Volume 1 of Wiley CPA Examination Review 2007-2008, Ray Whinttington, ISBN 0471798738, 9780471798736 Ray Whittington, Patrick R. Delaney. (2007).Wiley CPA Examination Review Vol. 1: Outlines & Study Guides, ISBN, Safari Books Online, Edition34, And Chicago: John Wiley and Sons. Ernst & Young LLP, Margaret Milner Richardson, Peter W. Bernstein .(2003).The Ernst & Young Tax Saver's Guide 2003, Ernst & Young Tax Saver's Guide, California: John Wiley and Sons. Raj Chetty, National Bureau of Economic Research. (2008).Is the taxable income elasticity sufficient to calculate deadweight loss?: the implications of evasion and avoidance Issue 13844 of Working paper series, Chicago: Publisher National Bureau of Economic Research. Brigham, E., & Erhardt, M. (2006).Wiley CPA Examination Review 2007-2008, Problems and Solutions, Volume 2 of Wiley CPA Examination Review 2007-2008, Ray Whittington, ISBN 0471798738, 9780471798736. O. Ray Whittington, Patrick R. Delaney. (2007).Wiley CPA Examination Review Vol 2: Problems And Solutions, Master class photography series, Edition3, Chicago: John Wiley and Sons. Raj Chetty, National Bureau of Economic Research. (2008).Is the taxable income elasticity sufficient to calculate deadweight loss?: the implications of evasion and avoidance, Issue 13844 of Working paper series, Chicago: National Bureau of Economic Research. Brigham, E., & Erhardt, M. (2010). Financial Management: Theory and Edition13, New York: Cengage Learning. Australia, CCH Australia Limited. (2009).Australian income tax legislation 2009, Volume 2 Australian Income Tax Legislation 2009, Chicago: CCH Australia Limited. David Reed. (2008).Mortgages 101: quick answers to over 250 critical questions about your home loan, Edition2, Chicago: AMACOM Div American Mgmt Assn. Powell, W., & Steinberg, R. (2006).The nonprofits sector: a research handbook, Edition2, Chicago: Yale University Press. Read More