Satisfied Customers: 36197
Experience: Retired (mostly)
replied 5 years ago.
The IRAC Tax Memo method is the process of analyzing a tax issue using standard legal reasoning as universally taught in every law school.
IRAC stands for Issue, Rule, Analysis, Conclusion. These are the separate sections of the memo. In practice, the real Acronym should be IFRAC, because the Facts are also stated in the memo. Example:
Can a tip be considered a nontaxable gift?
Restaurant server is serving a wealthly businessman. During the course of the meal, the coversation flows into the server's goals for the future. Server mentions a desire to attend medical school and states that she has the grades, but not the money, because her late husband died a long, agonizing death and the bills completely wiped out all of their savings. Businessman writes server a check for $100,000 as a "tip," at the conclusion of the meal.
In Commissioner v. Duberstein, 363 U.S. 278 (1960), the U.S. Supreme Court held that a nontaxable gift under the Internal Revenue Code
is "detached and disinterested generosity" and are often given out of "affection, respect, admiration, charity or like impulses."
Here, the customer's "tip" was not really in exchange for the service provided for the meal. It was, in fact, wholely disproportionate to anything that the sever could have possibly done as part of her job-related duty. More likely, the customer felt moved by the server's story and her need and simply decided to give the server something to help her straighten out her life.
Conversely, had the customer's tip merely been a small multiple of a typical restaurant tip, perhaps 30-50% of the meal, the facts would probably have remained that the customer was just a big tipper and the gratuity was in exchange for services rendered -- which is not an act of charity, but rather a recognition of the server's assistance with the meal -- and thus entirely taxable under the IRC.
A tip that is wholely disproportionate to the value of services rendered, may demonstrate an objective intent to make a nontaxable gift.