REQUIRED: Write an opinion letter to Ron Sneaky, Revenue Agent, presenting your opinion as to why Red is entitled to take the car racing expenses as a deduction. Ron Sneaky has

served Red Neck (and his wife, because they file joint returns) with a final determination letter, denying all of the expenses related to Red's car racing activities for taxable years 2021 and 2022. Red's year 2023 tax return will probably be selected by the IRS for review after it is filed. Red's CPA has requested a hearing before an IRS Appeals Officer for resolution of this matter (1st step in determination as to who will prevail, the next step would be to file a petition in Tax Court). Your letter is your argument as to why Red should prevail and be allowed the deductions for his car racing activities. You want the Appeals Officer to rule in Red's favor. In addition, you need to write a letter to Red, to inform Red as to the proper tax treatment of the 2024 or 2025 purchase of the new engine and transmission. The addresses of the parties are as follows: Red Neck Ron Sneaky 761 Lucky Drive Internal Revenue Service Moscow, Idaho 83843 Audit Division - Unit 13 Boise, ID 83724 Tim Nervous, IRS Appeals Officer Internal Revenue Service Citizens Building, 82nd Floor Boise, Idaho 83724/n RESEARCH PAPER ACCOUNTING 483 - FUNDAMENTALS OF FEDERAL INCOME TAXATION 1st Research Paper Spring 2024 FACTS: Red Neck is the used car sales manager of Ernie's Car Sales, a local new and used car dealership in Moscow, Idaho. Red Neck's income is about $145,000 a year from his salary and bonus (his bonus is a percentage of the net income of the dealership). In addition to his income from Ernie's, Red also has income from rentals of about $35,000 a year. Red's wife, Holiday, is employed, earning about $85,000 a year. Several years ago, Red became interested in auto car racing. In 2018, Red purchased a used car, which he converted into a racing stock car. The cost of the car, and the modifications made to it, cost Red about $75,000, which is being depreciated over a five-year life (using I.R.C. § 168). Red incurred additional expenses for the purchase of small tools, racing supplies, travel costs, etc. In 2019, Red started entering the Spokane auto races (actually Stateline Speedway at Stateline, Idaho). Because his job at Ernie's required him to work at least one Saturday every month, Red was not able to enter all of the races held in Spokane, but did enter as many as possible. Spokane holds races every weekend from the first part of April through the end of September. Red had some success in winning races, but because of the limited number of races Red could enter and the limited purse, his gross income was only about $500 the first year, $825 the second year, and $1,200 the third year. This 5th year (2024) Red expects to earn about $3,500 (gross income) and has hopes of being able to make some profit within the next year or two. His expenses (not including depreciation) were the greatest the first year, being about $84,000. Since the first year, the expenses have gone down because the car has been kept in good repair and Red has received free parts and services from sponsors. His total out- of-pocket costs for this year (2024) are anticipated to be about $25,000. Red has obtained several sponsors, which provide him with free parts, tires, gasoline, oil, and services or provide him with discounts on these items. The value of these discounts, or free items, will be about $50,000 this (2024) year. One of his sponsors is Ernie's, which provides all parts at one-half dealer's cost. The value of these parts, are expected to be about $25,000 this year (2024), which are not included in the $50,000 from other sponsors. If Red could win a few more races, the sponsor benefits should substantially increase. Red has kept good records of all of his income and expenses, recording them in a small cash journal. Red uses a separate checking account for the racing activities. Red has not recorded in his books and records the items his sponsors provided, but he does have a record of them. Red became involved in auto racing because he enjoyed it and because he thought he could someday make some money at it. Also, Red feels that the car racing helps promote the RESEARCH PAPER Acct. 483 - Spring 2024 Page 1 of 5 sales of the car dealership. The dealership sponsors him and has its name on the car, as do other sponsors. Red has taken the losses generated so far on his personal income tax returns. As a result of these losses, Red's income tax returns for the years 2021 and 2022 are being examined (audited) by the IRS. The revenue agent, Ron Sneaky, has proposed tax adjustments increasing Red's gross income by the amount of the deductions Red incurred in his racing activities because Ron is taking the position that the car racing activity is not a business. In addition to Red's problem with the IRS, he will need to buy a new engine and transmission for the racecar in 2024 or 2025. The cost of the engine would be about $60,000 and the cost of the transmission would be about $18,000. Red would like to expense both the engine and the transmission in the year that the costs are incurred. REQUIRED: Write an opinion letter to Ron Sneaky, Revenue Agent, presenting your opinion as to why Red is entitled to take the car racing expenses as a deduction. Ron Sneaky has served Red Neck (and his wife, because they file joint returns) with a final determination letter, denying all of the expenses related to Red's car racing activities for taxable years 2021 and 2022. Red's year 2023 tax return will probably be selected by the IRS for review after it is filed. Red's CPA has requested a hearing before an IRS Appeals Officer for resolution of this matter (1st step in determination as to who will prevail, the next step would be to file a petition in Tax Court). Your letter is your argument as to why Red should prevail and be allowed the deductions for his car racing activities. You want the Appeals Officer to rule in Red's favor. In addition, you need to write a letter to Red, to inform Red as to the proper tax treatment of the 2024 or 2025 purchase of the new engine and transmission. The addresses of the parties are as follows: Red Neck Ron Sneaky 761 Lucky Drive Moscow, Idaho 83843 Internal Revenue Service Audit Division - Unit 13 Boise, ID 83724 Tim Nervous, IRS Appeals Officer Internal Revenue Service Citizens Building, 82nd Floor Boise, Idaho 83724 RESEARCH PAPER Acct. 483 - Spring 2024 Page 2 of 5 COMMENTS ON WRITING YOUR PAPER (not part of the office memo) 1. Your letter should follow a proper recognized and acceptable business-letter form. There are several acceptable business letter forms, any one of which you can use, but you must follow the requirements of the acceptable business letter form you choose. Such acceptable business letter forms should have been covered in your business writing class (Eng. 317 at the University of Idaho). Also, such business letter forms generally can be found in any good secretarial book. 2. The required letter is your opinion as to the proper treatment of a particular factual situation. The purpose of your opinion is very similar to the purpose of an opinion written by a judge in a court proceeding. Therefore, you can use court opinions as a guide in writing your paper in both style and content. The principal difference, of course, is that the form of your opinion is a business letter and the principal form that courts use is a report form. Your opinion letter is not an essay, nor is it merely a review of the court opinions you have read. It must be an argument you set forth, supported by primary authority, which leads to your conclusion. Do not tell me what you have read it is not useful to the reader. You are required to convince the reader of your letter, and me, to agree with your position, argument, and/or point-of view. 3. You will need to research the law, regulations, revenue rulings, cases, and other relevant materials to prepare your opinion letter. You should use only primary authority, which consists of the Internal Revenue Code, Treasury Regulations Revenue Rulings, other publications of Treasury (i.e., pronouncements of the national office of the Internal Revenue Service), and Court cases. Use the Richmond book (Federal Tax Research - Richmond) to guide you through the research tools (sources) available and the proper procedure to apply the law to your assigned problem. Do not rely on Google sources to give you the "answer." It will not work. In fact, on Google there probably are no “answers", only conclusions. Your paper should provide your opinion - not your answer. Your client is not interested in the statements provided by others, but only interested in your opinion and your reasons for arriving at your opinion. 4 Always think about to whom you are writing your letter. It may not be, and probably is not, the addressee of your letter. To whom, you are writing your opinion letter is very important. You should write your letter to the person or persons who will probably read your letter, as these are the persons you want to convince, which may not be the addressee of your letter. 5. Always consider who will read your opinion letter. It may, and in fact probably will be, a person who's time is very valuable. Many professionals today charge their time at $2,500 per hour or more. The reader may not be pleased to read a document which takes a lot of time to read. In fact, they just not read the document. Get to the point of your letter and do not use any word which is not absolute necessary. 6. Clients, employers, judges, and others are not interested in what action (decision) you are telling them to follow or take. These people view their function, duty, and role as being decision makers - not you. If you attempt to make a decision or direct the action they should make, you may find yourself without a client, your employment terminated, the judge upset with your actions, or others no longer willing engage with you. I doubt that, as a professional, these are results that you want. Conclusions are generally nothing more than a decision 7. You must support your argument with controlling and current law. If you 7se a court opinion as support for your argument, you must insure that the opinion used is still the current law. You should avoid using conclusions in your paper, as conclusions do not help a reader to understand how and why you arrived at your opinion. If the reader of your letter or report does not understand how and why you arrived at your opinion, it is unlikely that the reader will agree with you and/or follow your advice. It is also possible that the client may misinterpret your recommendation and take some action which is inappropriate resulting in dire consequences to you. Great care must be taken in writing your paper so that your purpose of writing the letter conveyed to the reader, who may not be the person you addressed your letter, report, or other document to. DO NOT JUST TELL ME WHAT YOU READ - it is of no value 8. It is the Court's reasoning that will support your argument and not the holding in the case. Therefore, you need to explain how the court's reasoning applies to your facts and your argument. The Court's opinion or determination may not be important or helpful to you, your client, or reader of the letter. Reading a court opinion and then telling the reader of your letter RESEARCH PAPER Acct. 483 - Spring 2024 Page 3 of 5 what you read is not helpful to the reader. You must first have expressed an argument, then use the court's argument to support your position (argument). 9. If you immediately start this research project, you should have sufficient time to properly complete the assignment. If you wait until the last week or two to begin the assignment, you will not have sufficient time to write an acceptable opinion letter. If your letter is deemed to be unacceptable, you will not receive a grade for this assignment and this assignment is required to receive a passing grade in the course. 10. The College has a former English professor, Dr. D'Wayne Hodgin, on staff to assist you in writing your letter. As soon as you have a draft of your paper, you should make an appointment with Dr. Hodgin's to review your paper with you. You must have your draft of the paper reviewed by Dr. Hodgin on or before February 12th. He will maintain a list of all student's papers reviewed, which will be provided to me for grading. Make use of Dr. Hodgin early and often. 11. I am also willing to review a draft of your letter. If you wait until the last couple of weeks, I may not have sufficient time to review your paper. If you want me to review your draft, it should be done as soon as possible after seeking Dr. Hodgin's assistance. You may make an appointment with me or take a chance with first-come-first reviewed. 12. The key to any good writing is to rewrite, rewrite, rewrite, rewrite, rewrite and then rewrite. Every time you rewrite, you should be making changes to your manner of presenting your argument, making better use of your authority, emphasizing the point you are making, etc. 13. Good guides to writing an opinion letter are Judges' Court opinions. After all, what is expected of you is the same as what the judges are doing in their opinions. The form and manner of presenting your argument is the same as that used by Judges. 14. All citations must follow The Bluebook, A Uniform System of Citation, published by the Harvard Law Review Association. This is the same citation form required by most Courts and the citation form used by judges in writing their opinions. 15. You must also follow all of the requirements and provisions of IRS Circular 230 (§§ 10.34 through 10.37) and Treas. Reg. § 1.6662-4(d). The Treasury regulations and IRS Circular 230 require that you use only primary authority to support your argument. Primary authority is set forth in each of the publications. Read these assigned documents. 16. Again, make sure that your opinion letter is in proper business letter form. Improper grammar, sentence and/or paragraph construction, improper use of a word or misspelling will most likely result in a non-acceptable paper. A non-acceptable paper is treated as if no paper has been submitted. 17. Your letter must be printed on 8-1/2" x 11" white paper with 1" margins on top, bottom, and both sides. You need to use an Arial or Times New Roman font with either an 11 or 12 point print. All papers must be single-sided and single spaced. The back of any page will not be read. 18 All papers must be submitted on, or before, the beginning of the class due date, as set forth hereinabove. The papers will be collected at the beginning of the class. Those papers not collected at the beginning of class will not be read nor graded. Do not send papers by email, or RESEARCH PAPER Acct. 483 - Spring 2024 Page 4 of 5 any other electronic means, as such papers will not be printed-out and will not be read. Do not submit your paper by any other methods or means without prior approval from me, which I may grant only for very exceptional reasons. You can always submit your paper before the due date. 19. Do not put your name on the final paper which you turn in to me. Instead, use the assigned number for identifying your paper. You can obtain an assigned number, which you will use to identify you on all papers and exams required in this course, from the Department of Accounting office on the first floor of ALB. Failure to follow this requirement will result in your paper not being read nor graded. If you wait until the last minute, the office may be closed and you will be unable to get a number. In such case your paper will not be accepted for grading. 20. Late papers will not be accepted nor graded. You do not have to wait until the due date to turn-in your final paper. 21. If you immediately start preparing and writing your paper, you should have time to complete the assignment and meet any, and all, due dates. There should not be any need for late papers. This assignment may take a substantial amount of time - perhaps as much as 30- 40 hours. If you start this assignment when it is provided to you this means that you will have 4 to 5 hours per week to complete the assignment. I will take the role of the partner who interviewed the client. FAILURE TO FOLLOW THESE INSTRUCTIONS WILL BE TAKEN INTO CONSIDERATION IN DETERMINING YOUR GRADE IN THIS COURSE. 22. 23. (NOTE: This assignment may take a substantial amount of time to do properly. If you wait a week or two for starting, you may not have sufficient time to submit an acceptable paper. START WORKING ON YOUR PAPER THIS WEEK.) RESEARCH PAPER Acct. 483 - Spring 2024 Page 5 of 5