Analyzing Tax Accounting Memorandum

¶ … University has offered its professor $200,000 in order to relinquish tenure and resign. In particular, the aspect to consider is the tax consequence of such compensation. The professor's standpoint is that tenure should be treated as an intangible capital asset, and relinquishing tenure ought to be a long-term capital gain. The main tax issue in this case is whether the relinquishment of tenure encompasses a sale or interchange of a capital asset, which qualifies to be treated as long-term capital gains or should it be treated as ordinary income.

The paper will look at cases that have addressed this issue and come up with different ways in which this issue should be treated. This particular issue was directly addressed in the Foote vs. Commissioner case. The ruling made by the taxation court implied that the tenure does not classify as a capital asset and therefore the relinquishment of tenure by the taxpayer cannot be a sale or give-and-take (Leagle, 2016).

Devoid of these two requirements for capital gains treatment, the court made the ruling that the payment ought to be treated and taxed as ordinary income. However, in accordance to Everett et al. (2005), by laying emphasis on the substitute for ordinary income comparison, the tax court overlooked and failed to consider the prospective value of the tenure position to the university. More so, in the Merrill J. Foote v.

Commissioner case, the petitioner as well as the tax court overlooked the justifiable interest theory that was developed in the Commissioner v. Ferrer case. With respect to this case, the court made the ruling that the payment for the relinquishment of the royalty interest in the movie rights was taxed as ordinary income, for the reason that these constituted an alternative for ordinary income (Everett et al., 2005).

On the other hand, the court also made the ruling that the taxpayer had attained a justifiable interest in the copyright and ought to be given capital gains treatment for the compensation to be allocated for the relinquishing of the production rights (Everett et al., 2005). More so, Everett et al. (2005), points out that there was a ruling made by the Court of Appeals proclaiming that tenure was an acknowledged property right and not simply an agreement employment privilege.

Therefore, the court ruled that the university's compensation to tenured professors and members of its faculties under a timely retirement program did not constitute wages cause to undergo FICA tax or income tax withholding. Therefore, in this particular instance, basing on the ruling made by the tax court in the Merrill J. Foote v. Commissioner case, the university professor ought not to report the $200,000 amount being presented to him by the university, for resigning from his tenure position, as a long-term capital gain.

On this basis, his tenure at the university is not an intangible asset founded on his right to receive income from his personal services. The professor's salary is income granted for rendering personal services of teaching, and therefore.