Rico owns a building in downtown San Diego. Rico is trying to lease the building. Rico is a calendar-year, cash-method taxpayer and is trying to evaluate the tax consequences of three different lease arrangements. Lease option 1, the building rents for $5,000 per month, payable on the first of the next month, and the tenant must make a $5,000 security deposit that is refunded at the end of the lease. Lease option 2, the building rents for $55,000 per year, payable at the time the lease is signed, but no security deposit is required. Lease option 3, the building rents for $5,000 per month, payable at the beginning of each month, and the tenant must pay a security deposit of $10,000 that is to be applied toward the rent for the last two months of the lease.
a. What amounts are included in Rico’s gross income this year if a tenant signs lease option 1 on December 1 and makes timely payments under that lease?
b. What amounts are included in Rico’s gross income this year if the tenant signs lease option 2 on December 31 and makes timely payments under that lease?
c. What amounts are included in Rico’s gross income this year if the tenant signs lease option 3 on November 30 and makes timely payments under that lease?
Prepare a tax research memo for the tax files regarding the federal income tax treatment of the three alternative options. Please note for the first lease option there is judicial authority and please look to the regulations for the third lease option. You will need to support your conclusions using primary sources of tax law. Your textbook is NOT primary authority.
You must use proper citation form in your memo (see Chapter 2 for help with citation form). The form for this communication should be professional and in the form of a tax research memo (example posted on Blackboard and a similar example in your text on p. 2-20). Do yourself a favor and look at the grading rubric before you submit.
This memo should be whatever length you feel is appropriate to resolve the issues. We do NOT use a bibliography or list of references in a tax research memo. You will see that citations are within the text of the document in the example. Once a court case has been cited in full, it can be referred to using simply the name in italics.
Please do not simply regurgitate the background, but present the facts in a logical, factual manner.