Big Radio, LLC owns multiple radio stations. In the Albany, NY area, Big Radio owns Albany Radio

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Question:

Big Radio, LLC owns multiple radio stations. In the Albany, NY area, Big Radio owns Albany Radio North, LLC and Albany Radio South, Inc., two FM radio stations both acquired by Big Radio 15 years ago in a single transaction purchasing both radio stations together for $10 million each, $20 million for both radio stations. Albany Radio North, LLC and Albany Radio South, Inc. are simulcast. Both stations broadcast the exact same programming. Albany Radio North, LLC broadcasts to suburbs north of Albany, NY, and Albany Radio South broadcasts to suburbs south of Albany, NY. Both stations have a similar number of listeners and an equivalent size population. When Big Radio, LLC acquired the two Albany radio stations, North was an LLC and South was a C corporation.

Big Radio, LLC sold both Albany Radio North, LLC and Albany Radio South, Inc. in a single transaction in December 2021. The single sales price of $50 million was paid for both stations. Big Radio did not obtain a valuation of the radio stations. A valuation would have included a business valuation of each station, and appraisals of the FCC licenses for each station.

You are the Senior Tax Manager in charge of the tax compliance and planning for Big Radio, LLC. The audit is wrapping up, and the audit partner comes into your office. The audit partner tells you that he has been having an extremely tough time with the president and the CFO of Big Radio, LLC. He tells you that the president and CFO are insisting that the $50 million sales price for the two radio stations be allocated with $35 million to Albany Radio North, LLC and $15 million to Albany Radio South, Inc. Both the president and the CFO are insisting that the financial statements and the tax returns reflect the sale of the two radio stations with a $35 million sales price for North and a $15 million sales price for South. Assume the tax basis for each radio station is still $10 million.

The audit partner arranged a conference call for you, him, the president, and the CFO. On the conference call, the president and CFO stated “we are paying this firm big money for audit and tax, and we want the financials and tax return to reflect how we want the sale price allocated.”

You fire back stating that they need to read their tax engagement letter. You state that “you are paying us to complete the tax returns following the law and regulations. We will save you money in every way possible under the law. But with a 35/15 allocation of the $50 million, I will not sign the tax return”. You go on to mention taxpayer penalties and preparer penalties under the 6600s sections of the Code. You also explain that the AICPA SSTSs and IRS Circular 230 will not tolerate valuation misstatements. You tell the client to get valuations of both radio stations, and whoever values it better has experience in FCC licenses. The tax return is already on extension and is due in 4 weeks. You tell the client to get the valuations to substantiate the allocation of the $50 million sales price, or you will not sign the return. The president demands that he speak to the tax partner at the Philadelphia office. You and the audit partner set up a conference call for the end of the week that will now include yourself, the president, CFO, audit partner, and the tax partner.

Requirements:

Write a tax research memorandum to the tax partner that discusses valuation misstatements, preparer penalties, taxpayer penalties, and any other related issues to document why you took this position with the client. Include what you believe is the motivation of the client for their allocation and whether you can sign the return. Chapter 1 covers tax research. There is a research guide and an example tax research memo in Appendix A of the textbook. Use in-text citations. The tax research memo should contain the following sections: