Client Letter Examples
This web page provides two examples of client letters that Albert B. Smith, a staff
accountant, drafted on September 14, 2003. The letters are based on the facts for
practice research. Before reviewing this web page, we recommend that you study
the client letter lesson , read the facts for practice research, complete the
research, and attempt to formulate a letter for both Fly Jones, the professional
basketball player, and Mr. Simpson, Fly’s attorney.
Letter to Fly Jones (Tax-Unsophisticated Client)
Dear Mr. Jones:
I appreciate the opportunity to advise you regarding this tax matter. To
ensure a complete understanding between us, I am stating the pertinent
information about the advice that I will be rendering and the facts you
provided to me.
Responsibilities
I use my judgment in resolving questions where the tax law is unclear or
where conflicts may exist between the taxing authorities. Unless you instruct
me otherwise, I resolve such questions in your favor whenever possible.
However, the opinion I express does not bind the Internal Revenue Service
(IRS). Thus, I cannot guarantee the outcome in the event the IRS challenges
my opinion. You remain responsible for any tax or related liabilities
resulting from an adverse IRS or judicial decision.
The law imposes various penalties when taxpayers understate their tax
liabilities. Tax professionals also may be subject to penalties when an
understated tax liability is based on a position that the professional
recommends but has no realistic possibility of being sustained. A realistic
possibility of success exists if the tax professional has a good faith belief
that the position has at least a 1 in 3 chance of being sustained on its merits
if challenged.
Facts
The following facts are based on your written correspondence 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 a professional
basketball team, the Wyoming Wildcats. To discourage laziness and mental
errors, your teammates formed the Slammin-Jammin Club on August 30,
2002. Membership in the club was voluntary, but every Wildcat joined.
Each time someone on the opposing team blocked a shot during a regular
season game, the Wildcat who was “slammed and jammed” paid a $100 fine
to the club. When a Wildcat was responsible for a turnover (e.g., having the
ball stolen), he paid a $50 fine. Good performance (e.g., blocking the shot of
or stealing the ball from an opposing player) did not reduce fines otherwise
payable. At the end of the season, your club had collected approximately
$40,000. According to club rules determined at the season’s beginning, one-
tenth of the fines were used to fund a barbecue for the players and their
families on March 15, 2003. (You did not attend the barbecue because your
grandmother’s funeral was the same day.) The rest of the funds, again
according to previously-determined club rules, were given to the American
Red Cross. The Red Cross knew nothing about the contribution until it
occurred on May 12, 2003. One month later, the American Red Cross sent
individual letters of thanks and receipts to each member of the club. The
donation amount on each receipt was based on a report the club’s treasurer
prepared.
Of the $40,000, you contributed $2,200 to the Slammin-Jammin Club in
2002 and $2,800 in 2003. You itemize deductions and file jointly. Your
adjusted gross income is about $117,000.
Conclusions and Recommendation
Based on our research, you can deduct most of the fines you paid to the
Slammin-Jammin Club as a charitable contribution since they are in the
nature of gifts per Duberstein, a 1960 Supreme Court decision. In this
judicial case, the taxpayer received a Cadillac in return for periodically
giving names of potential customers to a business associate. The Supreme
Court held that the Cadillac’s value was gross income to the taxpayer since
the donor’s intent to make a gift was the key factor establishing the transfer
as a gift. Similarly, you intended to make a gift to the American Red Cross.
You voluntarily joined the club and were aware from the beginning that the
bulk of fines you paid would benefit the American Red Cross. Thus, you are
entitled to a deduction.
You should deduct $4,500 of your $5,000 contributions. Since the club used
10% of the total contributions to pay for the barbecue (a personal expense),
10% of your contributions ($500) is not deductible. According to a 1967
revenue ruling, the fact that you missed the barbecue does not matter. The
$4,500 deduction should be claimed on your federal tax return for 2003
since the club turned over funds to the American Red Cross during that year.
My conclusions are based on the facts above and the tax law as it existed on
September 12, 2003.
Please let me know if you wish to discuss any of these issues further. I’ve
certainly enjoyed working with you on this project and look forward to
assisting you in the future when you need tax advice.
Best regards,
Albert B. Smith
Staff Accountant
Letter to Fly’s Attorney (Tax-Sophisticated Client)
Dear Mr. Simpson:
I appreciate the opportunity to advise you regarding this tax matter. To
ensure a complete understanding between us, I am setting forth the pertinent
information about the advice that I will be rendering.
I use my judgment in resolving questions where the tax law is unclear or
where conflicts may exist between the taxing authorities. Unless you instruct
me otherwise, I resolve such questions in your favor whenever possible.
However, the opinion I express does not bind the Internal Revenue Service
(IRS). Thus, I cannot guarantee the outcome in the event the IRS challenges
my opinion. Mr. Fly remains responsible for any tax or related liabilities
resulting from an adverse IRS or judicial decision.
The law imposes various penalties when taxpayers understate their tax
liabilities. Tax professionals also may be subject to penalties when an
understated tax liability is based on a position that the professional
recommends but has no realistic possibility of being sustained. A realistic
possibility of success exists if the tax professional has a good faith belief
that the position has at least a 1 in 3 chance of being sustained on its merits
if challenged.
Based on our research, Fly can deduct $4,500 of the fines he paid to the
Slammin-Jammin Club. He should claim the deduction as a charitable
contribution on his tax return for 2003. My conclusions are based on the tax
law as it existed on September 12, 2003, and the facts in the attached tax
research memo. If these facts are incomplete or incorrect, please let me
know right away.
Please let me know if you wish to discuss any of these issues further. I’ve
certainly enjoyed working with you on this project and look forward to
assisting you in the future when you need tax advice.
Best regards,
Albert B. Smith
Staff Accountant
