ACC610 Week 1 Assignment Exercises Chapter 1­

Problem #40

Bart exchanges some real estate (basis of $800,000 and fair market value of $1 million) for other real estate owned by Roland (basis of $1.2 million and fair market value of $900,000) and $100,000 in cash. The real estate involved is unimproved and is held by Bart and Roland, before and after the exchange, as investment property.

a. What is Bart’s realized gain on the exchange? Recognized gain?

a. Realized Gain=$200,000 ((900,000+100,0000)­800,000)

b. Recognized Gain=$100,000 which is less than the $200,000 received (§1031)

b. What is Roland’s realized loss? Recognized loss?

a. Realized Loss=$300,000 (1,000,000­(1,200,000­100,000))

b. None of the loss can be recognized

c. Support your results in (a) and (b) under the wherewithal to pay concept as applied to likekind exchanges (§ 1031).

a) Since Bart’s financial situation has improved since receiving the $100,000 cash, he should be allowed to defer payment of the tax on the realized gain until he has enough money to cover it.

Locate the following cited items and give a brief description of the topic or opinion in the item:

a. § 6694(a)­ reasonable people’s positions lead to understatement. This statute addresses the issue of a tax preparer understating a taxpayer’s liability. A tax preparer can be hit with a $1,000 fine or 50% of any money the preparer makes off of the return or claim for refund, whichever is greater, if the preparer knows or should have known that the position exists.

Summary of Preparer Penalties under Title 26. (n.d.). Retrieved September 14, 2018, from https://www.irs.gov/tax­professionals/summary­of­preparer­penalties­under­title ­

b. § 1.6694­1(b)­ refers to the penalties that tax return preparers face if they make an error that results in a tax bill being understated. In addition, it specifies that a tax preparer is the person primarily responsible for the results of the tax return or refund claim that includes the incorrectly reported liability. Last but not least, the IRS may identify more than one person as the responsible tax preparer if those people work for or are affiliated with different businesses.

26 CFR 1.6694­1 ­ Section 6694 penalties applicable to tax return preparers. (n.d.). Retrieved

September 14, 2018, from https://www.law.cornell.edu/cfr/text/26/1.6694­1

c. Rev. Rul. 86­55, 1986­1 C.B. 373.­ seeks to address the following three questions:

a. Is a business owner who also does tax prep work counted as a tax prep service provider? Based on the court’s interpretation of the tax preparer definition in 7701

(a)(36),

b. the individual is considered to be a tax preparer whether or not a separate fee was charged. This is because the court views the arrangement as a bundle. What are the repercussions if they are labeled a tax preparer, b.

c. The penalties outlined in 6694(a) that we discussed above would apply to the preparer Is it legal for the IRS to allow the assignment of refund checks prior to their issuance? According to the decision, refunds cannot be assigned prior to the URS issuing them. The taxpayer, not the preparer, is the proper recipient of the refund check.

Revenue Ruling 86­55 Internal Revenue Service 1986­1 C.B. 373. (n.d.). Retrieved September

14, 2018, from http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irlbc19/1/d oc

d. PLR 8022027­ The issue of whether or not a tax preparer complied with the rules when filing a tax return for 1976 is discussed in a Private Letter Ruling from 1980 (the 22nd week’s 27th ruling). It was determined that the preparer did not exercise reasonable care in ensuring that the 1976 tax return was accurate and complete, leading to improper deductions. According to Section 6694(a), the preparer was subject to a $100 fine

Written Determination Number: 8022027 Internal Revenue Service February 29, 1980.

(n.d.). Retrieved September 14, 2018, from http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irlbc30/1/d oc

Ellie and Linda are equal owners in Otter Enterprises, a calendar year business. During the current year, Otter Enterprises has $320,000 of gross income and $210,000 of operating expenses. In addition, Otter has a long­term capital gain of $15,000 and makes distributions to Ellie and Linda of $25,000 each. Discuss the impact of this information on the taxable income of Otter, Ellie, and Linda if Otter is:

a. A partnership­a partnership is not treated as a separate entity, as such any profit/loss would flow through the partners. The following would be reported:

a. Partnership Form 1065. Net Profit=$110,000(320,000­210,000); $15,000 longterm capital gain

b. Schedule K1 of Ellie and Linda: Net Profit=55,000 (50% of $110,000 for each partner);

$7,500 long­term capital gain (50% of $15,000 for each partner)

c. The long­term capital gain has a preferential tax rate of 0%,15%, or 20%

d. Further, the withdrawals do not affect taxable income but decrease their basis in the partnership.

b. An S corporation­ an S corporation is not treated as a separate entity, as such any profit/loss would flow through the shareholders. The following would be reported:

a. S corporation Form 1120S Net Profit=$110,000(320,000­210,000); $15,000 longterm capital gain.

b. Schedule K1 of Ellie and Linda: Net Profit=55,000 (50% of $110,000 for each shareholder); $7,500 long­term capital gain (50% of $15,000 for each shareholder)

c. The long­term capital gain has a preferential tax rate of 0%,15%, or 20%

d. Further, the withdrawals do not affect taxable income but decrease their basis on the S corporation.

c. A C corporation0 a corporation is its own legal entity.

a. Corporation Form 1120 would show taxable income of $125,000

(320,000210,000+15,000).

b. Ellie and Linda will report $25,000 of dividend income based on the distribution they received. Will carry preferential tax rate of 0%,15%, or 20%

c. Unlike S corporation and partnerships, long­term capital gain does not have a preferential tax rate.

In the current year, Tanager Corporation (a C corporation) had operating income of $480,000 and operating expenses of $390,000. In addition, Tanager had a long­term capital gain of

$55,000 and a short­term capital loss of $40,000.

Operating Income 480,000 $50K @ 15% Tax

Less: Operating Expenses (390,000) $25K @ 25% Tax

LTCG 55,000 $25K @ 34% Tax

Less: STCG (40,000) $5K @ 39% Tax

Total Taxable Income 105,000 Total Tax Due

Compute Tanager’s taxable income and tax for the year.

Operating Income 480,000 7,500

6,250

8,500

1,950

24,200

Less: Operating Expenses (390,000) $50K @ 15% Tax 7,500

LTCG 15,000 $25K @ 25% Tax 6,250

Less: STCG (15,000) ^ $15K @ 34% Tax 5,100

Total Taxable Income 90,000 Total Tax Due 18,850

b. Assume, instead, that Tanager’s long­term capital gain was $15,000 (not $55,000). Compute Tanager’s taxable income and tax for the year.

capital loss can be reconciled to capital gains. $25K NOL is carried 3yrs back and 5yrs forward

Jane, Jon, and Clyde incorporate their respective businesses and form Starling Corporation. On

March 1 of the current year, Jane exchanges her property (basis of $50,000 and value of $150,000) for 150 shares in Starling Corporation. On April 15, Jon exchanges his property (basis of $70,000 and value of $500,000) for 500 shares in Starling. On May 10, Clyde transfers his property (basis of $90,000 and value of $350,000) for 350 shares in Starling.

a. If the three exchanges are part of a prearranged plan, what gain will each of the parties recognize on the exchanges?

There is none, because the nonrecognition provision would apply to all of the swaps if the transactions were part of a prearranged plan as per 3351.

b. Assume that Jane and Jon exchanged their property for stock four years ago, while Clyde transfers his property for 350 shares in the current year. Clyde’s transfer is not part of a prearranged plan with Jane and Jon to incorporate their businesses. What gain will Clyde recognize on the transfer?

Fair Market Value 350,000

Less: Basis (90,000)

260,000

c. Returning to the original facts, if the property that Clyde contributes has a basis of $490,000 (instead of $90,000), how might the parties otherwise structure the transaction?

Clyde could stand to lose $140000 if his transfer is processed along with Jane and Jon’s. Clyde would write off the loss, reducing his taxable income.

Fair Market Value 350,000

Less: Basis (490,000)

Loss (140,000)