CASE The Loaded Leprechaun (hereafter, the Leprechaun) is a popular chain of Irish-themed restaurants with locations in tourist hotspots across the United States, including Boston, Chicago, Denver, Las Vegas, New York, Orlando, and Seattle. The Leprechaun bills itself as “America's Greatest Brew Pub” and specializes in excellent steaks and six varieties of beer that are brewed in-house at each location. The Leprechaun has been owned and operated as a private company since its founding in 1948 by the O'Shaughnessy family of Boston, MA. One of the great traditions at the Leprechaun is the “Dollar Holler.” Patrons personalize dollar bills by writing a message or drawing a picture with a permanent marker and then staple the dollar to the ceiling, wall, banister, or any other available surface in the restaurant (see Figure 1). As each dollar goes up, the employees let out an appreciative yell. Patrons supply the dollar bills themselves, although the wait staff will make change for customers who need dollar bills. Each customer is allowed to place as many dollar bills as they like on the walls, and most place at least one dollar bill on the wall per visit. Over the years, this tradition has grown in popularity, and the O'Shaughnessy family estimates that the average restaurant has accumulated more than $1 million in personalized dollar bills. The dollars are not regularly counted, and the wait staff does not participate in any accounting for dollar bills, other than by asking that customers not remove existing dollar bills (a problem that the company frequently encounters). Historically, the company has prepared cash basis financial statements for internal use. However, Bridgett O'Shaughnessy (the founders' granddaughter) has recently obtained control of the company and is considering taking the company public in order to pursue an aggressive, nationwide expansion plan. As part of this process, she has employed your firm to prepare a set of financial statements in accordance with U.S. GAAP. Preparation of the financial statements is relatively straightforward, with the exception of the accounting surrounding the dollars the company receives from customers as part of the “Dollar Holler” tradition. Management has previously ignored these dollars for accounting purposes.
REQUIREMENTS You have been tasked with researching the following questions. Be sure to include relevant citations.
Tax Issues
1. How should the company report the “Dollar Holler” transaction for federal income tax purposes? Consider that while the role of a tax accountant/adviser is to be an advocate for the taxpayer, professional standards require consideration of evidence in support of and contrary to the desired conclusion.
2. Assuming the company is organized as a C Corporation, where would the company report the “Dollar Holler” transaction on its federal income tax return? (Instructions for tax returns are useful in this compliance function.)
3. Assume that you conclude the “Dollar Holler” dollars are income. Include in your memo what the self-employment tax consequences would be if the company was organized as an S Corporation, partnership, or sole proprietorship instead of a C Corporation.
Answers
CASE The Loaded Leprechaun (hereafter, the Leprechaun) is a popular chain of Irish-themed restaurants with locations in tourist hotspots across the United States, including Boston, Chicago, Denver, Las Vegas, New York, Orlando, and Seattle. The Leprechaun bills itself as “America's Greatest Brew Pub” and specializes in excellent steaks and six varieties of beer that are brewed in-house at each location. The Leprechaun has been owned and operated as a private company since its founding in 1948 by the O'Shaughnessy family of Boston, MA. One of the great traditions at the Leprechaun is the “Dollar Holler.” Patrons personalize dollar bills by writing a message or drawing a picture with a permanent marker and then staple the dollar to the ceiling, wall, banister, or any other available surface in the restaurant (see Figure 1). As each dollar goes up, the employees let out an appreciative yell. Patrons supply the dollar bills themselves, although the wait staff will make change for customers who need dollar bills. Each customer is allowed to place as many dollar bills as they like on the walls, and most place at least one dollar bill on the wall per visit. Over the years, this tradition has grown in popularity, and the O'Shaughnessy family estimates that the average restaurant has accumulated more than $1 million in personalized dollar bills. The dollars are not regularly counted, and the wait staff does not participate in any accounting for dollar bills, other than by asking that customers not remove existing dollar bills (a problem that the company frequently encounters). Historically, the company has prepared cash basis financial statements for internal use. However, Bridgett O'Shaughnessy (the founders' granddaughter) has recently obtained control of the company and is considering taking the company public in order to pursue an aggressive, nationwide expansion plan. As part of this process, she has employed your firm to prepare a set of financial statements in accordance with U.S. GAAP. Preparation of the financial statements is relatively straightforward, with the exception of the accounting surrounding the dollars the company receives from customers as part of the “Dollar Holler” tradition. Management has previously ignored these dollars for accounting purposes.
REQUIREMENTS You have been tasked with researching the following questions. Be sure to include relevant citations.
Tax Issues
1. How should the company report the “Dollar Holler” transaction for federal income tax purposes? Consider that while the role of a tax accountant/adviser is to be an advocate for the taxpayer, professional standards require consideration of evidence in support of and contrary to the desired conclusion.
2. Assuming the company is organized as a C Corporation, where would the company report the “Dollar Holler” transaction on its federal income tax return? (Instructions for tax returns are useful in this compliance function.)
3. Assume that you conclude the “Dollar Holler” dollars are income. Include in your memo what the self-employment tax consequences would be if the company was organized as an S Corporation, partnership, or sole proprietorship instead of a C Corporation.