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Jose Hernandez is president of Hernandez Specialty Equipment Corporation, a C corporation based in Miami. He plans to purchase a new corporate jet that will be used by corporate officers and other employees to attend business meetings around the country. He said that too much time is now lost due to the airport security measures that have been implemented in the last several years and he believes that he could get a good price on the aircraft if he purchases it this year.
When the jet is not being used for business trips, it will be made available to the top four corporate officers for their personal use. Jose is looking forward to being able to fly to Sonoma, California on the new jet when he takes his family there to his vacation home in the wine country. Jose wants to make sure that all of the expenses for the aircraft will be fully deductible by the corporation. He is aware that the officers may have some taxable compensation on their personal use of the jet. He wants to know what type of records he needs to set up to be able to determine the value of personal travel on the new jet and what methods are acceptable in determining that valuation. For example, can the corporation use the cost of a first-class ticket on a commercial aircraft as the amount that should be taxed to employees for their personal use? He wants to make sure that if the corporation is audited by the IRS, he will have all of the required documentation. So he needs your assistance in determining if any limits will be placed on the company’s deduction for the jet (his desire is to maximize the deduction for the corporation) and how to determine the amount of taxable compensation to the employees for their personal use of the job.
Required: Research the above issues for Hernandez Specialty Equipment Corporation and prepare a ‘memo to file’ as shown in your textbook on page 92. Your memo should have four sections: (1) facts, (2) issues (stated as questions), (3) conclusions (short answers to each issue), and (4) discussion of your reasoning and authorities. When writing the discussion section of your memo, start with the Internal Revenue Code section, then the Regulation section, then any relevant IRS rulings or other pronouncements, and finally any relevant court cases. Please be sure to include appropriate citations for any primary sources you cite (refer to Figure 2A.2 on page 91 in your textbook for examples of citations). You can use secondary authority to assist you in locating primary authorities, but you cannot cite any secondary authorities in your memo to file (you must find the appropriate primary authority and cite only that). You do not need to prepare a client letter only the memo to file. Submit one memo per group.
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