Consider the case of a man who purchases a tattered old painting at a swap meet for $10.00. All he really wanted was
the frame, not the painting. Upon peeling back the painting, he discovers an original signed
copy of the Declaration of Independence tucked beneath it. This very rare copy of the
Declaration is worth millions on the open market.
The issues you might identify from these basic facts would include economic income,
realization of income, the timing of recognition of income and the character of that income.
Query 1: Does the taxpayer have to recognize income upon finding the copy of the
Declaration of Independence or may the recognition event be deferred until some
later date (e.g. when the document is sold)?
Query 2: What is the character of any income recognized (i.e., capital or ordinary)?
Does the holding period of the painting affect this answer?
In this section of the memorandum, a student would delineate in sufficient detail the tax
question or questions identified in the case facts. This section
is your first significant challenge – to identify what the major tax issue or issues
is/are in your case. While your case may already contain a general question or statement,
a student generally must augment and/or restate the question(s) in greater detail.