Research Memo 65 points

Your clients, Amy and Bob Smith, approach you about a tax planning idea called The Augusta Rule that they saw on TikTok. They have a personal residence in Ohio, a second residence in Michigan and a condo in Florida where Bobs father lives. They own and operate a successful IT consulting practice that is organized as an S corporation. They each own 50% of the S Corporation shares. They would like to use the personal residences to meet with and entertain clients and are proposing that the S Corporation rent each home for 14 days at a rental rate of $2,500 per day which amounts to rent expense of $35,000 annually for each residence and $105,000 in total. They based the daily rental amount on their desire to shelter approximately $100,000 of income. They have calculated that this will save them roughly $40,000 in tax as they are currently in the highest marginal federal and state brackets.

Draft a tax research memo addressing the Smiths proposal and make recommendation(s), citing appropriate primary authority. Keep in mind that this is a tax planning memo; the transactions have not happened (yet), so you are free to explain the cautionary tale of their proposal as well as to offer suggestions as to what they should to insure a more favorable outcome.

Your memo should specifically address and cite the Internal Revenue Code. Apply the law from these sections to the situation:

• IRC 162(a)
• IRC 280A(g)

You should also cite at least one relevant court case. There are certainly many to choose from, but here are two recent cases you can refer to:

• TC Memo 2023-140 Jadhav v. Commissioner
• TC Memo 2023-105 Sinopoli v. Commissioner