Big Company paid $100,000 at the beginning of the year to a large law firm to retain its services should they be needed during the course of the year. The law firm specializes in real estate law and is considered the best firm in this field. Big Company feared that one of its competitors would engage the law firm. This would prevent Big Company from being able to use the firm's services because of conflict-of-interest rules that preclude a firm from representing different clients with actual or potentially adverse legal interests. To prevent this, Big engaged the firm and paid the retainer fee. Occasionally, Big asked the firm to perform legal work in areas where Big's in-house lawyers were not as well equipped. It is now December, and it is clear that a substantial amount of the initial retainer will not be used to pay for legal services rendered. The retainer agreement provides in this case that any unused amount shall be returned to Big, with interest, at year-end.
Big Company is a longtime client of yours. It has asked you to look into whether any of the retainer fee will be deductible. It wishes to have this advice before the beginning of next year when it will determine whether to pay another $100,000 retainer to the law firm for the year.
a. Are there any additional questions you should ask the client before you begin your research?
b. What additional potential sources of information might you want to ask for?
c. Which of the preceding facts are relevant? Which are irrelevant?
d. Is there a chance that you will need to ask more questions at a later point? Why or why not?
e. What is the first question you will try to answer in your research? Are there any additional issues that you can identify at this time?
f. What is the taxpayer's desired result? Why is this important? How does it affect your role as tax advisor?
g. Is this a planning research type of situation? How do you know?