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Tax Research Memo Assignment

Facts of the Case:

Tony Messina is the primary shareholder in Metro Culinaria, Inc., a corporation that owns several restaurants in the metro area. Tony owns 80% of the stock in Culinaria and his youngest son, Martin, owns 20%. The estimated value of Culinaria stock is $2,800,000. Tony’s basis in his stock is $600,000 and Martin’s basis in his stock is $300,000.

Tony’s older son, Tony Jr., is also the owner and primary chef of a popular restaurant that he runs as a sole proprietorship. The estimated market value of Tony Jr.’s restaurant is $800,000 and Tony’s basis in the sole proprietorship assets is $400,000. Tony Jr. left the family business many years ago to strike out on his own, but the family is now interested in uniting all of the family restaurants into a single corporate umbrella.

The unification plan is to create a new holding corporation named Messina Properties, Inc. and contribute the stock of Metro Culinaria, Inc. and the assets of Tony Jr.’s restaurant to the new corporation. Metro Culinaria would then become a wholly owned subsidiary of Messina Properties. The plan is to handle the transaction as a Section 351 exchange. The total market value of the new stock is estimated to be $3.6 million. Tony Sr. would receive 62.2% of the market value of the stock, Martin would receive 15.6% of the stock, and Tony Jr. will receive 22.2% of the market value of the stock. Tony Sr. would be the president of the new corporation.

Tony Sr. is currently 62 years old and isn’t sure how much longer he would like to continue in the business. A preferred plan for his eventual departure is to exchange his Metro Culinaria stock for Messina common and a single class of Messina preferred stock (he would be the only preferred stockholder). He would take about 50% of the market value of his new stock in Messina common stock and about 50% of the market value of his new stock in Messina preferred. The exchange would still leave him as the majority common shareholder in the Messina Corporation for the time being. However, his share of common stock would be smaller with this type of exchange and a larger portion of the future growth in the market value of the common stock would go to his sons under this type of exchange. Over time, he also plans to make gifts of his common stock to his sons to increase their common stock holdings. It is anticipated that the market value of the preferred stock would remain relatively stable over future years.

A particular area of concern of the plan being considered is the appropriate qualities of the proposed preferred stock. Tony would like to receive a regular cumulative preferred dividend on his preferred stock and he feels that a return of 6% would be a good annual return. Alternatively, a floating rate that would be tied to an index such as the prime rate is being considered and this may be a bit cheaper of an alternative for the corporation for the present. The family is also considering making the preferred stock redeemable under alternative conditions as a way of a partial buyout. Tony Sr. is not particularly in a hurry for the redemption of preferred stock but the family is interested in the available alternatives.
Required:

Respond to the primary issues of concern for the taxpayers and make appropriate suggestions for how to structure this transaction so that the transaction will be non-taxable and meet the taxpayer’s goals to the extent possible. Reference Source: Internal Revenue Code Section 351

This memo has specific directives that are detailed below. Included after those directives is a scoring rubric that you also should consult for guidance.
How to Find These References:

1. Go to www.mnsu.edu
2. Go to Library Resources.
3. Go to article databases A-Z thenpick “R” letter to find RIA Checkpoint and click it.
4. Please enter StarID (Write): tg5578jj
5. Please enter password (Write): Mm6713588&
6. On the lift corner you will see “Current view” Please choose “Tax” from the list.
7. Click on the down arrow of “FEDERAL TAX” then click on “Search federal”.
8. On the lift side please click on “Find by citation”. Then, WRITE 351 in the current code and click search.
Side Note: When you call up Internal Revenue Code sections, RIA will have buttons labeled “FTC” or “WG&L Treatises” or something like that next to the various provisions of the Code section. Clicking these will take you to supplementary explanatory materials from RIA with references to primary legal authorities footnoted within them that have interpreted and explained these Code provisions.
Required Format:

The memo MUST employ the following format with the prescribed sections identified by the subheadings:

Facts: A brief statement of the pertinent facts (BUT DON’T JUST CUT AND PASTE MINE!). This section needs to tell the reader a story and should be written in narrative form. Just listing facts as bullet points seldom tells an adequate story. Remember to include all relevant facts and assumptions.

Issues: Issues are questions. They are not facts or conclusions. The issues should be stated briefly but precisely without too much technicality at this point. Issues should be stated simply to address the bottom line concerns of the interested parties. Leave technical points and collateral issues to the “Discussion” section.

Discussion: The “Discussion” section is a presentation of the reasoning for the resolution of the issues complete with 1) appropriate organization of paragraphs and employing subheadings where needed or helpful and 2) sound reasoning backed by cited authority.

In this part of the memo, you should address technical points and address collateral issues when necessary. You should schedule computations if necessary for illustrative purposes.

Assume the memo is intended for a reader with some technical knowledge but not an expert. You have the responsibility for educating the reader, not just resolving the issues. Your discussion should start with an introductory paragraph giving a general explanation of controlling principles of the law at issue. Those general principles will probably include parts (sub-requirements or words and phrases) requiring further explanation, application, and resolution. Some or all of these parts are sufficiently important to merit separate paragraphs.

Summary: a very brief overall restatement of your conclusions and overall reasoning.

Further Guidelines:

1) PAY ATTENTION TO PROPER CITATION OF LEGAL SOURCES! Follow the citation format in the documents you consult. Consult your text (Chapter 2) for the correct form for citing legal sources. Citing secondary sources for explanations, illustrations, or arguments/advice is fine but you should always CITE THE PRIMARY LAW when you are explaining legal rules. My experience has been that students, on the whole, tend to under cite sources so make sure that all borrowed propositions are sufficiently cited. I don’t care whether you cite in the text or by way of end notes.

2) Make sure this paper is well written and edited. With modern word processors, there is no excuse for lousy writing. Edit your paper until you are confident you are communicating as well as you can.

3) I have a pet peeve with people using indefinite pronouns like “It,” “This,” “That” as subjects (or even objects) in writing. People resort to this practice in writing because using these words as subjects is common practice in casual speaking, but writing the way one speaks casually often results in lazy and imprecise writing. Instead of using indefinite pronouns as subjects, define a subject word or phrase precisely. Defining a word or phrase precisely often paves the way for further thoughts.

4) The Discussion section should be the bulk of your memo. You should start the discussion with a paragraph that provides a general review of overall concepts/rules. The remaining paragraphs should provide greater explanation and details on the concepts and rules mentioned in the first paragraph but each paragraph should be focused around a single topic and should be introduced by a meaningful and focused topic sentence. If you have only one long paragraph with five different topics, I will not think kindly of your paper! When you are feeding technical information to a reader, you must serve it in small, digestible bites!

5) Below is the rubric I use for grading the memo.

Research Memo Points Score Desirable Qualities
Facts Section 3 Brief but sufficient statement of necessary facts and assumptions. Tells the important story to the reader.
Issues Section 3 Issues with clear, identifiable, and significant meaning stated in plain English. Should limit to the primary issues of interest and should omit collateral technical issues.
Discussion Section 9 Starts with an overview of the concepts for resolution of the main issues. Takes the time and effort to be informative, complete, well written and explained. Schedules or tables calculations or numbers when necessary and labels information in any tables. Provides relevant legal authority for conclusions.
Summary Section 3 Provides a brief but clear statement of the main findings of the memo
Clarity, readability, overall quality of writing 6 Was the paper clear, readable, well-organized? Did all paragraphs begin with a clear topic sentence introducing the theme of the paragraph? Were all paragraphs organized around an identifiable theme? Were grammar and syntax of an acceptably professional level?
Technical Accuracy 4 Were the resolutions correct from a technical standpoint?
Citation of law or other references 2 Was citation employed sufficiently and correctly?
Total score 30
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