2021-2022 LAW STUDENT TAX CHALLENGE OFFICIAL J.D. DIVISION PROBLEM - American Bar ...
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2021-2022 LAW STUDENT TAX CHALLENGE OFFICIAL
J.D. DIVISION PROBLEM
It is October 31, 2021. You are a first-year associate looking forward to a night out with friends.
You still can’t believe the partner you have been working for, Elma Johnson, agreed to let you
take off All Saints’ Day (November 1, 2021) on such short notice, but maybe you should stop
being surprised because she has been great since your first day on the job. You have just put
the finishing touches on your Halloween costume (Baby Shark – third year in a row) and open
your work email on your cell phone to send Elma one last “Thanks again!,” this time with a selfie
attached. Unfortunately, you see a new email from Jan Leviathan, a senior tax partner in your
firm, that is marked Important. It reads:
Sorry to bother you on Halloween – it is my favorite day of the year. Elma has spoken so highly of you,
and I hope you can help us with some research for an interesting matter.
We are currently negotiating a deal on behalf of our clients Mikael and his fiancé, Barack, for the
purchase of Rays and Rain, a solar and roofing company. Mid-Sized Town Bank, the bank providing the
financing for the purchase, raised concerns about potential federal income tax liabilities incurred by
Barack in 2019 and 2020 that the bank discovered during due diligence. The deal is closing soon, so,
unfortunately, we are against a very tight deadline.
I have attached an email from Barack that provides important information. In addition, I just got off the
phone with Mikael.
On the call, Mikael told me that Barack started a cryptocurrency trading operation in February 2019.
Notwithstanding Barack’s “entrepreneurial spirit” and “intellectual motor,” the operation lost money. On
December 26, 2019, Barack decided to liquidate all positions and cash out. Barack has told Mikael that
when he eventually files his 2019 return, he plans to take a $65,000 loss on Schedule C since he “started
out with $100,000 and a dream” but ended up with “$35,000 and regrets.” Mid-Sized Town Bank has
expressed concerns about whether the loss Barack plans to claim is appropriate. Please research the
following:
1. Barack provided additional details about the cryptocurrency operation in the attached email.
Assuming everything in the email is accurate, determine whether Barack was a “trader,”
“investor,” or a “dealer” in securities during 2019.
2. Now assume Barack was a trader in securities during 2019. Barack would like to offset his
software designer income, discussed in the email below, with losses from the cryptocurrency
business to the maximum extent possible. Look at the limitation on capital losses under IRC
section 1211(b). Does it apply? Assuming it does, can Barack make a section 475(f) election? If
he can, should he make it?
a. For this question and all others, you should assume the cryptocurrency is a capital asset
for tax purposes.
3. Now assume Barack was an investor in securities during 2019.
a. Can Barack deduct his ordinary and necessary expenses from the cryptocurrency
operation (detailed below) on Schedule A of his 2019 income tax return? If so, can he
deduct them in full?
b. Can Barack deduct investment interest expenses (detailed below) on Schedule A of his
2019 income tax return?
c. Can Barack recognize the capital loss from his cryptocurrency operation on his 2019 tax
return?2021-2022 LAW STUDENT TAX CHALLENGE OFFICIAL
J.D. DIVISION PROBLEM
i. If so, can he deduct it in full?
ii. If he can’t recognize all of his capital loss from his cryptocurrency operation in
2019, what happens to the unrecognized amount?
Further, Mid-Sized Town Bank was not impressed that Barack has not yet filed a tax return for 2019.
Barack recently received a notice of deficiency from the IRS for his 2019 tax year, dated August 28,
2021. The letter was addressed to Barack at Mikael’s home in New Orleans, Louisiana, where Barack has
been living since June 15, 2019. The notice provides a deadline of November 26, 2021, to file a petition
with the U.S. Tax Court, and proposes the following:
▪ Increase in tax based on
o Unreported W-2 income as reported by Barack’s employer,
o Unreported 1099 income as reported by Barack’s 401(k) custodian, and
o Unreported 1099 gross proceeds from sales/exchanges as reported by Barack’s
cryptocurrency brokerage account; and
o 10-percent additional tax on early distributions from a qualified plan;
▪ Penalties for failure to file and failure to pay; and
▪ Interest.
According to Mikael, the IRS sent another notice of deficiency for Barack’s 2019 tax year to Barack’s old
condo in New York City. 1 This notice is dated July 1, 2021, and provides a September 29, 2021, deadline
to file a petition with the U.S. Tax Court. It is identical to the notice dated August 28, 2021, except it does
not propose the 10-percent additional tax on early distributions. 2 Please research the following:
1. Is the August 28, 2021 notice a valid notice of deficiency under IRC section 6212? Please cite
relevant case law in your answer.
2. Assume the August 28, 2021 notice is not valid. Mikael thinks they might have received a letter
from the IRS asking to rescind the notice dated July 1, 2021. Is that permitted?
a. If it is permitted, should Barack agree to the rescission? Why or why not?
3. Assume that the notice that was sent on August 28, 2021, is valid. Does the qualified higher
education expense exception apply to the proposed 10-percent additional tax on early
distributions from a qualified plan?
a. See Barack’s email for details about the early distribution.
There is one other thing Mikael mentioned that piqued my interest. Barack’s daughter Magda recently
came across a video online that alleges Rider LLC, a ride-sharing company, has been taking advantage of
its drivers by incorrectly classifying them as independent contractors instead of employees. Mikael said
Magda spent the last two summers driving for Rider LLC 3 and now Barack is interested in helping Magda
report Rider “to the tax authorities.” Please research the following:
1. What is the IRS procedure Magda would use to challenge her worker classification status?
1
Since Barack never filed tax returns for 2019 or 2020 (or otherwise informed the IRS that he moved), the New
York City condo was Barack’s “last known address” per IRS records.
2
The 10-percent additional tax on early distributions is significantly smaller than the sum of the other items on the
second notice.
3
Rider LLC sent Magda a Form 1099-K for each year in question.2021-2022 LAW STUDENT TAX CHALLENGE OFFICIAL
J.D. DIVISION PROBLEM
2. What does Magda stand to gain from a successful challenge?
a. How does Magda claim any money resulting from a successful challenge?
b. What is the deadline for claiming such money?
c. Assume the deadline is approaching soon and Magda has only just filed her challenge
with the IRS. What can she do to protect her future interest in a successful challenge?
3. Could Magda appeal an adverse determination? If so, how?
a. What about Rider LLC? If so, how?
Do not provide any calculations for any of the questions above. I just want an understanding of the
general rules (hopefully, this makes your job easier so you can enjoy some trick-or-treating).
Please provide me with a memorandum that addresses each of the issues noted above. Additionally,
please draft a formal letter to Barack and Mikael discussing the issues.
Many thanks!
Jan Leviathan
Senior Tax Partner2021-2022 LAW STUDENT TAX CHALLENGE OFFICIAL
J.D. DIVISION PROBLEM
Jan—
Thanks for helping with this case. Below is the email I mentioned. Please let me know if
you need anything else.
***
I’m a 45-year-old software designer at a large insurance company. In 2019, I earned a
salary of $140,000. I’m the single parent of Magda, a college student. On January 5,
2019, I made an early withdrawal from my traditional 401(k) retirement account in the
amount of $100,000 with the intent to help Magda pay for school.
On January 8, 2019, my phone showed me a social media "memory" from 2016 at the
Flaming Woman Festival, picturing my festival friend, Elona, and myself. The digital
flashback triggered more memories of the festival weekend, including many heated
debates on the merits of cryptocurrency between Elona and anyone brave enough to
disagree with her. Elona recently paid off her children's student loans after cashing in a
cryptocurrency investment made back in 2016. I, unfortunately, had never bought any
cryptocurrency myself.
There's a popular Chinese proverb that says: “The best time to plant a tree was 20
years ago. The second-best time is now.” This was my mindset when I decided to try
to grow the $100,000 from my 401(k) by investing it in cryptocurrency. While I didn’t
need the extra money for my current expenses, I really wanted to be able to pay for
Magda’s college in full, and $100,000 just doesn’t go as far as it used to, does it?
On January 15, 2019, I opened a crypto “wallet” and purchased $75,000 worth of the
three best-known cryptocurrencies. I also added $15,000 to my wallet so I could day
trade on so-called “altcoins,” which can be compared to penny stocks. I spent the
remaining $10,000 on non-depreciable, ordinary, and necessary business expenses (e.g.
consulting services, subscriptions, etc.). I had a two-prong investment strategy: I
wanted to buy and hold the blue-chip coins for long-term growth while simultaneously
day trading the altcoins. I was able to maintain this strategy until about five months in
when I was forced to liquidate some of my positions in the blue-chip currencies to fund
the day trading of altcoins. I estimate I spent an average of two hours a day, five days a
week actively trading. As far as volume, I can provide a report showing the following
activity on my account during 2019:
- 2,250 trades executed since February;
- $590,000 total value of securities purchased and sold; and
- Investment interest expenses of $3,000.
The only thing more intense than the day trading itself was participating in the day
trading community online. I spent considerable time (in addition to the two hours a day
actively trading) on those forums looking for information to help profit from short-term
swings in the altcoin market, but most of it was useless. The sad truth is that while the2021-2022 LAW STUDENT TAX CHALLENGE OFFICIAL
J.D. DIVISION PROBLEM
blue-chip coins nearly doubled during the period, I lost my shirt day trading the
altcoins. Perhaps they’re right that crypto is a “young person’s game.” I’m just glad I
got out before I lost every dime.
Luckily, the remaining $35,000 in the account was just enough to cover Magda’s first
tuition payment - that check cleared on December 31, 2019. My 2020 New Year’s
Resolution was to never invest in junk like crypto again, and I have kept my word to this
day. I bet that stuff is worthless by now...
Best,
BarackYou can also read
