Tax discussion memo assignment
You will review two research memos addressing the same question. Discuss the two memos and what changes you would make if any to EACH memo in order to improve it.
Date: October 18, 20XX
From: Terry Intern
Re: Sabrina (Tax Year 2015)
Sabrina Student is currently enrolled full-time at Florida International University (FIU) and is in the process of completing a Bachelor of Physics. Sabrina was awarded a $20,000 scholarship to attend FIU due to academic excellence. Sabrina is not required to perform any services in exchange for this scholarship. In the current year Sabrina paid $14,000 for tuition expenses, $300 for required lab fees and $1,000 for her required books and supplies. Sabrina also paid $4,800 for her room and board. Sabrina paid total fees of $20,100 to FIU in this current year.
Issue 1: Is the $20,000 considered a scholarship?
Conclusion 1: Yes, this money qualifies as a scholarship based on the Internal Revenue Code.
Tax discussion memo Analysis 1:
In determining the tax consequences of the $20,000 scholarship awarded to Sabrina the Internal Revenue Code Section 117(c)(1) states tuition and related expenses are not included as income because they do not require future service from the student receiving the scholarship. Sabrina meets the requirement to be a candidate for a degree eligible for a scholarship because she is an
undergraduate student at a University who is pursuing studies to meet the requirements for a professional degree.
Issue 2: Is the full amount of the $20,000 scholarship excluded from Sabrina’s gross income?Conclusion 2: No, based on the Internal Revenue Code and Proposed Federal Tax Regulations only $15,300 is eligible to be excluded from the taxpayer, Sabrina’s income.
The IRC Sec. 117(c)(1)(B) further states that amounts received must be used for qualified tuition related expenses in order to be excluded from gross income. IRC Sec. 117(c)(2)(A) provides the guidelines for qualified tuition and related expenses. This section states these expenses include fees, books, supplies and any equipment required for courses. Sabrina will not be providing
future service to FIU and will not have any tax liability on the scholarship money used to pay for tuition and her required tuition related expenses. Sabrina’s qualified tuition related expenses are her lab fees, supplies and books required for her courses.
A total of $15,300 of Sabrina’s scholarship is excluded from the current year’s gross income. Sabrina cannot exclude this income if she acts beyond the scope of a student in a lab. Any benefits provided to FIU from Sabrina could compromise the income exclusion. In the case of Barney Reiffen and Constance Reiffen v. The United States, [67-1 USTC ¶9439], two electrical engineers performing research in labs at Massachusetts Institute of Technology were scrutinized for filing a tax return requesting a return on money they received as a scholarship.
The Reiffen’s were under the impression they were being compensated for their discoveries at the lab and not receiving all excludable income. All discoveries made by the Reiffen’s were of no benefit to MIT and used for their education only. The couple was not eligible for a refund and could not include the amounts paid by the institution in their gross income.
Issue 3: Does Sabrina have to pay taxes on the remaining amount of the scholarship not used for
tuition and course required material?Conclusion 3: Sabrina will not pay taxes on the remaining amount if that is her only income for
Tax discussion memo Analysis 3:
According to the Proposed Federal Tax Regulation Section 1.117-6, any income in excess of the tuition and qualified expenses is included gross income. Sabrina would be required to report the remaining $4,700 received from the scholarship not used on tuition and qualified expenses even though she used it for room and board.
According to the regulation, room and board is considered an incidental expense because the room and board is not required for her enrollment at FIU. If the remaining $4,700 was the only income generated by Sabrina in the current year she would not be required to file a tax return because her income is below the $10,300 applicable gross income threshold.
FROM: Tracy Tax
RE: Sabrina Student (Tax year 2015)
My client, Sabrina Student, is a full-time physics major at Florida International University
(FIU) in Miami, FL. Sabrina currently receives $20,000 per year as a scholarship. Her
expenses for this year include:
– $14,000 for tuition
-$300 required lab fees
-$1,000 required books and supplies
-$4,800 room and board expense
Issue and Conclusion 1
Is Sabrina required to pay taxes on her $20,000 scholarship?
Yes, Sabrina is required to pay taxes on a portion ($4,700) of the scholarship.
Scholarships are considered to be tax-free as long as they meet certain requirements.
The scholarship should not exceed her expenses, it is not designated for other purposes (such as room and board), and it should not represent payment for any services. All of her expenses qualify as educational expenses and would be tax-free except for the room and board. Since the total of her educational expenses is $15,300, this is the amount of the scholarship that is tax-free. The remaining $4,700 of the scholarship is taxable.
Issue and Conclusion 2
Can Sabrina deduct any educational expenses for herself?
Yes, Sabrina can deduct certain educational expenses.
Sabrina is able to deduct educational expenses because she meets all three
Tax discussion memo requirements:
1. She pays qualified educational expenses of higher education
2. She pays the educational expenses for an eligible studentA2
3. The eligible student is herself
The maximum that she can reduce her income subject to tax is $4,000.
Last Updated on July 20, 2020 by Essay Pro