Instructions: Answer the following questions. Your answers must be uploaded to Canvas prior to noon on December 7, 2017 in doc, docx, xls, and/or xlsx format.
Question 1 – Short Answers (5 points)
In Checkpoint, locate a Tax Court Summary Opinion from February 2011 that addresses 1031 like-kind exchanges and read the entire case. Once you have read the entire case, answer the following in a separate Word document:
- In your own words, briefly explain what the Tax Court’s holding was (i.e. was the transaction a like-kind exchange) and why?
- What could the taxpayer have done differently to achieve the intended result (nonrecognition treatment)?
Hint: search using the “Tax Court Summary Opinions” source, and, once your search results are displayed, sort your results by Relevance, not Table of Contents (see photos below).
Question 2 – Tables and Memorandum (25 points)
Facts: Your client, Rachael Marlin, came to your firm for advice on how to structure a transaction to minimize her tax liability. You met with Ms. Marlin, and she informed you of the following facts:
A. Ms. Marlin is single with no dependents. She is a non-dealer in land. She purchased a piece of investment property (land) in 2000 for $65,000. She has not made any capital improvements to the land or invested any additional money in the land.
B. Ms. Marlin believes that the real estate market is going to crash in 2018, so she wants to lock in a sale price for the land in 2017. However, she is currently in a much higher marginal tax bracket than she anticipates being in for 2018 and beyond, so she does not want to recognize all of the gain in 2017.
C. Ms. Marlin currently has an unrelated buyer that will purchase the land for $200,000. Ms.
Marlin will pay $0 selling expenses to effectuate the sale.
D. In 2017, without factoring in any gain or interest on the sale of the land, Ms. Marlin anticipates having taxable income from wages of $50,000 (this is after her SD and exemption). She will be in the 25% ordinary income marginal tax bracket, and the tax liability on her ordinary income in 2017 will be $8,239.
E. Ms. Marlin is retiring at the end of December 2017, and she anticipates that, without any gain or interest from the sale of the land, her taxable income each year after 2017 will be exactly $0 (i.e. her ordinary income will equal her SD + exemption).
F. Ms. Marlin has sufficient savings to live off for at least the next 5 years, so she does not need the funds from the sale of the land during this time. Assume that any proceeds and interest payments received on the sale of the land would be spent immediately, so you do not have to
factor into your calculations any interest earned by investing this money.
G. Ms. Marlin will have no capital gains or losses other than the sale of the land during this 5- year period.
Research what an installment sale is and how to calculate each year’s taxable gains under the installment method. You can use any reliable source to conduct your research. You may want to start by searching for installment sale/installment method using the following sources (all editorial material in Checkpoint) and read through the various results:
• Tax Planning and Practice Guides (Special Studies)
• Federal Tax Handbook
• Federal Tax Coordinator Analysis
After you have completed your research and have a working understanding of installment sales and the installment method, create two tables in Excel forecasting the amount and character of Ms. Marlin’s taxable income and her tax liability over the next 5 years under each of the following two scenarios:
(i) Ms. Marlin sells the land for $200,000 on December 31, 2017 and receives all $200,000 in 2017. Under this option, Ms. Marlin would have no interest income from the sale of the land. The gain on the sale of the land in 2017 would be in addition to her $50,000 in taxable income (ordinary income).
(ii) Ms. Marlin sells the land in an installment sale with a $40,000 down payment in 2017 (with no interest) and then four equal annual installments of $40,000/year for 2018 – 2021 (with adequate stated interest). Ms. Marlin would not elect out of the installment method. The payment schedule is as follows:
December 31, 2017: $40,000 down payment/principal (no interest)
December 31, 2018: $40,000 principal and $4,800 interest
December 31, 2019: $40,000 principal and $3,600 interest
December 31, 2020: $40,000 principal and $2,400 interest
December 31, 2021: $40,000 principal and $1,200 interest
In making your calculations, assume that tax rates and tax brackets will remain at 2017 levels for the next 5 years. Remember that capital gains are subject to preferential rates that vary depending on the taxpayer’s marginal tax bracket, but interest is taxed as ordinary income (at the taxpayer’s ordinary income tax rates). There is no set format you need to use for your tables. However, the tables should look professional and all relevant information should be clearly displayed and labeled. Someone reading the tables should be able to quickly and easily interpret the results and identify how you calculated your forecasted tax liability for each scenario. Use formulas in cells where possible.
Lastly, draft a brief memorandum for your boss, John Doe, using a professional business memorandum format. In your own words, (i) outline the relevant facts from your meeting with Ms. Marlin and (ii) briefly explain your tables and why using the installment method for this particular transaction results in a lower overall tax liability (despite higher overall taxable income from the interest payments). Cite all sources you used to research installment sales/installment method in your memo, including the relevant Code section.
Tax Research Project Grading Rubric – Question 2
Quality of Tax Research
_ /8 points • Do you demonstrate an understanding of installment sales and the installment method? • Did you use appropriate sources? • Did you cite your sources, including the Code and all other sources used? Quality of Answer /9 points
• Does your answer address the specific question(s) presented?
• Did you apply the tax law to the given facts in a logical manner?
• Do you accurately forecast tax liability under the two scenarios?
Quality of Written Communication
/8 points • Is the information clearly communicated in both the Excel tables and written memo? • Is your communication professional (e.g. no spelling/grammatical errors, professional format, etc.)?
Total Score _/25