UCLA FEMBA Program
MGMT 227 - Spring 2011 (Prof. Freixes)
TAX ANALYSIS NO. 1
I. The Assignment
You will conduct tax research, using RIA’s online tax database, regarding one of the
issues listed below and prepare a Tax Memorandum to me with your analysis. You can
choose any of the topics for your paper. The paper should be 8-12 pages, single-spaced
and follow the Tax Memorandum format contained in samples I provided in the syllabus. I
expect you to follow the IRAC method and to cite your primary law authorities (e.g. IRC,
cases, regulations). YOU MAY PREPARE YOUR PAPER WITH UP TO FOUR OTHER
STUDENTS. The paper is due April 28, 2011 and is worth 25% of your class grade.
II. PROBLEM NO. 1
Deducting Your MBA: Roger was employed as an engineer with Rocket Industries
from May 1, 2005 to May 31, 2010. In May, 2008, the company appointed him as section
chief of his department (staff of 30). In Fall of 2008, he started his MBA with the FEMBA
program at UCLA (Class of 2011). In 2009 & 2010, he had no self-employment income.
He quit his job with Rocket Industries in June 2010. In July 2010, he started his own
engineering consulting business, Roger Rocket Consultants, and has continued in that
venture until the present date. His FEMBA Program tuition and fees were $ 31,000 in
2009 and $ 33,000 in 2010. Assume Roger is single and that his adjusted gross income in
2009 was $ 58,000 and it was $ 120,000 ($ 50,000 from salary & $ 70,000 from his
business) in 2010. Roger seeks your advice about how he can best deduct his MBA costs
on his 2009 and 2010 tax returns. Please write a brief memorandum advising Roger of his
best options for 2009 and 2010. Discuss all alternatives and make a recommendation.
III. PROBLEM NO. 2:
Estate Planning: You represent a wealthy married couple with two adult children
and four grandchildren: Harold & Maude Dinero. The Dineros have a net worth exceeding
$ 30 million, including stocks, mutual funds, apartment buildings and Maude’s successful
advertising agency (a sole proprietorship). Discuss the tax liabilities of Harold and Maude
under the Uniform Transfer Tax (Estate & Gift Tax) rules in the event Harold and Maude
die in 2011 with no estate plan in place (under the recent Obama/Congressional revisions
to the Estate Law). Furthermore, indicate what Estate and Gift Planning you would
recommend to the Dinero’s to minimize their Estate & Gift Tax liability.
IV. PROBLEM NO. 3:
Employee Stock Options: Sharon is negotiating with Westwood Industries, Inc. for a
position as Westwood’s CEO. The company manages several web sites offering health
advice to individuals. Some of the web sites have been successful, while others have
failed to generate much revenue. The company’s stock value has steadily risen in price
over the last two years. Sharon believes the company’s future prospects are positive, but
worries about another high-tech bubble bursting. Westwood and Sharon are discussing
stock options as part of Sharon’s compensation package. They are considering Qualified
Incentive Stock Options (ISO’s) and Non-Qualified (or Non-Statutory) Stock Options
(NQSO’s). The company also wants to include a right of forfeiture or redemption in the
stock for the first three years of Sharon’s employment (i.e. if she works for <3 years, she’ll
have to resell her stock back to Westwood). In other words, Sharon’s stock will not be
vested for the first three years of her employment. Write a tax memorandum to me
discussing the tax consequences to Sharon and the corporation if she exercises her ISO
or NQSO options (include AMT consequences). Assume the stock will increase in value
when she exercises the option and when her stock rights vest. Make a recommendation to
Sharon as to her best course of action.
V. PROBLEM NO. 4:
Intellectual Property Rights: Creative Co., a high-tech firm has developed several
bio-tech patents and copyrights on some video games. Additionally, they have purchased
the Trademark to a popular video game character for use in game and toy merchandising.
They are debating whether to retain the IPR and distribute these products to the public
themselves, to license the IPR’s to another firm or to sell the asset outright. They seek
your advice on the tax consequences of these various options. Please discuss how these
various IPR’s will be classified for tax purposes (ordinary, capital, Sec. 1231) and how the
sale or licensing of these assets would be taxed under the various scenarios the company
is considering. For this purpose, assume two scenarios: (1) Creative Co. is a partnership
(therefore its owners would jointly hold the IPR) and, (2) Assume it is a corporation.
VI. PROBLEM 5:
Employee Compensation: You are a member of the Board of Directors of MicroIntel, a growing multi-million dollar high tech corporation. The Board has a vacancy to fill
for the corporation’s CEO and wishes to consider an attractive salary and benefits package
for the new chief. Additionally, the Board wishes to incorporate some similar incentives for
its existing officers and managers to ensure they will stay with the company. Summarize
several suggested options and discuss the tax consequences of these options to the
corporation and the employees. Be sure to include discussion of salary, bonuses,
retirement plans (discuss the various options), Life Insurance, Disability Insurance, Health
Insurance. Do not discuss Stock Options (as they are covered in Problem 3 above).
VII. PROBLEM 6:
Divorce American Style: Donald and Marla, a wealthy couple, are filing for divorce.
Donald does not work and will retain custody of their two minor children (ages 8 and 10).
Marla is a famous actress, earning more than $ 5 million per year. They must divide over
$ 30 million in assets, including their family residence, Marla’s restaurant and three
apartment buildings. Donald seeks alimony and child support. Marla seeks your advice
regarding the tax consequences of the divorce. She wants to be able to deduct all
payments to Donald, wishes to avoid income taxation and wants to establish high bases
on the assets she will retain in the event of later resale. Discuss the tax consequences of
this divorce. Assume Marla will pay for the children’s schooling and medical expenses.