Suppose your client, Maritza, is an unmarried individual U.S. taxpayer

Suppose your client, Maritza, is an unmarried individual U.S. taxpayer living in New York City. She informs you that she recently entered into a settlementagreement with her investment advisor. The investment advisor has paid Maritza $150,000. The payment is attributable to investment losses caused by theinvestment advisor’s alleged failure to follow the asset allocation directions from Maritza. Specifically; Maritza instructed her advisor to change the investmentobjective for her account from “all equity” to “current income.” The advisor understood these instructions to mean reallocate her portfolio from equity to incomegradually over time, rather than an immediate sell off and restructuring. Maritza claims that her intention was to do an immediate sell off and restructuring.Hence, a dispute arose with respect to the correct interpretation of her instructions and the decline in market value of the equity position over the length of timeit took her advisor to gradually sell (restructure) her equity portfolio to income. Maritza says this could have been avoided had the change in asset allocationbeen implemented immediately the way she wanted. In the interests of both parties in settling the dispute without admission of fault by either party, theinvestment advisor agreed to pay Maritza $150,000.Maritza (the payee) wants to know the following:Is this settlement payment taxable for federal income tax purposes?AndIf so, what is the character of the payment? Is it a reduction of tax basis of investment assets, ordinary income, or short or long-term capital gainincome?In addition, research and address what the income tax consequences are to the investment advisor (the payor) in making the settlement payment. Is thepayment deductible, and if so, what is the character of the deduction?Hint: Recall that income tax consequences in general are symmetrical; meaning that if one taxpayer for a given transaction has to report income, then the othertaxpayer to the transaction generally has a deduction.Sample Tax MemorandumTitle:Requested By:Submitted By:Date Submitted:FACTS:This section should include all facts relevant to your analysis and conclusion.ISSUE(S):This section lists the tax questions that are presented in the facts. A tax researcher must analyze the facts carefully so that all of thequestions or major issues are addressed. According to convention, each question should consist of one sentence. This makes questions verydifficult to write. If the issue is complex, it may need to be broken down into several separate issues.CONCLUSION:Your memorandum should include a section that briefly summarizes the conclusions you have drawn from your analysis or discussion.LAW AND ANALYSIS:This section (some refer to as “Discussion”) is the core of the memorandum. It restates each of the issues. Each question is followed by adiscussion or analysis in which the writer shows how the tax law (statutes, cases, etc.) applies to the facts in the case. Each question shouldbe answered.

 

 

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