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Letter to Fly Jones (Tax-Unsophisticated Client)

Dear Mr. Jones:I appreciate the opportunity to advise you regarding this taxmatter. To ensure a complete understanding between us, Iam stating the pertinent information about the advice that Iwill be rendering and the facts you provided to me.ResponsibilitiesI use my judgment in resolving questions where the tax law

is unclear or where conflicts may exist between the taxingauthorities. Unless you instruct me otherwise, I resolvesuch questions in your favor whenever possible. However,the opinion I express does not bind the Internal RevenueService (IRS). Thus, I cannot guarantee the outcome in theevent the IRS challenges my opinion. You remainresponsible for any tax or related liabilities resulting from

an adverse IRS or judicial decision.

The law imposes various penalties when taxpayersunderstate their tax liabilities. Tax professionals also maybe subject to penalties when an understated tax liability isbased on a position that the professional recommends buthas no realistic possibility of being sustained. A realisticpossibility of success exists if the tax professional has a

good faith belief that the position has at least a 1 in 3chance of being sustained on its merits if challenged.

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FactsThe following facts are based on your writtencorrespondence to me dated June 2, 2003. If these facts are

incomplete or incorrect, please let me know right away.You are a U.S. citizen and play point guard for aprofessional basketball team, the Wyoming Wildcats. Todiscourage laziness and mental errors, your teammatesformed the Slammin-Jammin Club on August 30, 2002.Membership in the club was voluntary, but every Wildcatjoined. Each time someone on the opposing team blocked a

shot during a regular season game, the Wildcat who wasslammed and jammed paid a $100 fine to the club. Whena Wildcat was responsible for a turnover (e.g., having theball stolen), he paid a $50 fine. Good performance (e.g.,blocking the shot of or stealing the ball from an opposingplayer) did not reduce fines otherwise payable. At the endof the season, your club had collected approximately$40,000. According to club rules determined at the seasonsbeginning, one-tenth of the fines were used to fund abarbecue for the players and their families on March 15,2003. (You did not attend the barbecue because yourgrandmothers funeral was the same day.) The rest of thefunds, again according to previously-determined club rules,were given to the American Red Cross. The Red Crossknew nothing about the contribution until it occurred on

May 12, 2003. One month later, the American Red Crosssent individual letters of thanks and receipts to eachmember of the club. The donation amount on each receiptwas based on a report the clubs treasurer prepared.

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Of the $40,000, you contributed $2,200 to the Slammin-Jammin Club in 2002 and $2,800 in 2003. You itemizedeductions and file jointly. Your adjusted gross income is

about $117,000.

Conclusions and RecommendationBased on our research, you can deduct most of the finesyou paid to the Slammin-Jammin Club as a charitablecontribution since they are in the nature of gifts perDuberstein, a 1960 Supreme Court decision. In this judicial

case, the taxpayer received a Cadillac in return forperiodically giving names of potential customers to abusiness associate. The Supreme Court held that theCadillacs value was gross income to the taxpayer since thedonors intent to make a gift was the key factor establishingthe transfer as a gift. Similarly, you intended to make a giftto the American Red Cross. You voluntarily joined the cluband were aware from the beginning that the bulk of fines

you paid would benefit the American Red Cross. Thus, youare entitled to a deduction.You should deduct $4,500 of your $5,000 contributions.Since the club used 10% of the total contributions to payfor the barbecue (a personal expense), 10% of yourcontributions ($500) is not deductible. According to a 1967revenue ruling, the fact that you missed the barbecue doesnot matter. The $4,500 deduction should be claimed onyour federal tax return for 2003 since the club turned overfunds to the American Red Cross during that year.

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My conclusions are based on the facts above and the taxlaw as it existed on September 12, 2003.Please let me know if you wish to discuss any of these

issues further. Ive certainly enjoyed working with you onthis project and look forward to assisting you in the futurewhen you need tax advice.

Best regards,

Albert B. Smith