TAX 650 Final Project
Case:
You are currently working.at a mid-sized certified public accounting firm. Your client is
Bob Jones. Bob, age 60 and single, has recently retired from IBM. He has $690,000 available in
his 401(k) fund and he is thinking of using that money to open a used car business that will be
located at 210 Ocean View Drive in Pensacola, Florida. Bob has estimated that the business
might make $300,000 in taxable income.
Bob’s personal wealth including investments in land, stock, and bonds is about
$14,000,000. He reported an interest income of $20,000 and dividend income of $6,000 last year.
The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for $450,000.
Bob has hired your firm for professional advice regarding whether he should operate as a
sole proprietor, a partnership, an S corporation, or a C corporation. He is also considering
transferring a possible 40% interest in his new business to his daughter Mandy, age 23 and
single.
Milestone One: Gross Income and Capital Gains
I. Memorandum
E. Calculate the property disposition capital gains and taxation of gross income. Identify
the tax consequences on the sale or exchange of the land consistent with capital gain
rules. Consider the selling expense, broker’s fees, closing costs, appraisals, and surveys
and the correct schedule form to complete.
, First, Bob had stated he wanted to use the amount he has available in his 401(k) towards
the used car business. As per Publication 575, Pension and Annuity Income, considering that
Bob’s contributions to the 401(k) may have been pre-tax and he receives the $690,000 in a lump
sum, he would not be subjected to the additional tax of 10% given that he is 60 years old, but the
entire amount will be treated as ordinary income and will be subject to the maximum tax bracket
(39.6%). If he opted for the lump sum, he could end up paying approximately $220,000 and only
end up with approximately $440,000 of his pension for investment in his new business.
Second, Bob stated that he has $9,000,000 worth of land. As per Publication 544, Sales
and Other Dispositions of Assets, there are various alternatives Bob can consider in order to
obtain the most benefit from the sale of his investment properties and acquisition of the potential
business location. We did research on the topic and found the following alternatives:
a. Sale of land – Bob can sell portion of the land he owns and use the proceeds towards
the new business venture. If he sells at least portion of the land, the capital gains from
the sale would be subject to a maximum tax bracket of 20%, which is almost half of
what he would be subject to if he would have received the 401(k) lump sum. For
example, let’s say that Bob sells all the land he owns for the FMV.
Sale $9,000,000
Less: Cost (450,000)
Capital gain from long-term investments 8,550,000
Times: applicable tax bracket 20%
Equals: Tax determined from the sale 1,710,000
, b. Taxable exchange – Bob can exchange the $5,000,000 worth of stocks and bonds for
the property he needs to open his business. This type of transaction is used when the
exchange of assets are not similar. The value of the property you receive will be
measured using the Fair Market Value and any gain or loss will be recognized in the
tax return.
For example, Bob exchanges his stocks and bonds for a building worth $6,000,000.
Fair Market Value of the property received $6,000,000
Less: Book value of the property given up 5,000,000
Equal: Capital gain 1,000,000
Times: Capital gain tax bracket 20%
Tax due $200,000
II. Conclusion
D. Describe the after tax effects on the client’s cash flow based on the sale of the land
that is needed to provide the funds necessary to start the business. Consider including
capital gains tax rules.
As per Publication 544, Sales and Other Dispositions of Assets, Bob can sell the lands he
owns in order to obtain cash to invest in his new business. He would only be taxed for a
20% of the capital gains resulted from this transaction. Like in the previous example, Sale
Case:
You are currently working.at a mid-sized certified public accounting firm. Your client is
Bob Jones. Bob, age 60 and single, has recently retired from IBM. He has $690,000 available in
his 401(k) fund and he is thinking of using that money to open a used car business that will be
located at 210 Ocean View Drive in Pensacola, Florida. Bob has estimated that the business
might make $300,000 in taxable income.
Bob’s personal wealth including investments in land, stock, and bonds is about
$14,000,000. He reported an interest income of $20,000 and dividend income of $6,000 last year.
The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for $450,000.
Bob has hired your firm for professional advice regarding whether he should operate as a
sole proprietor, a partnership, an S corporation, or a C corporation. He is also considering
transferring a possible 40% interest in his new business to his daughter Mandy, age 23 and
single.
Milestone One: Gross Income and Capital Gains
I. Memorandum
E. Calculate the property disposition capital gains and taxation of gross income. Identify
the tax consequences on the sale or exchange of the land consistent with capital gain
rules. Consider the selling expense, broker’s fees, closing costs, appraisals, and surveys
and the correct schedule form to complete.
, First, Bob had stated he wanted to use the amount he has available in his 401(k) towards
the used car business. As per Publication 575, Pension and Annuity Income, considering that
Bob’s contributions to the 401(k) may have been pre-tax and he receives the $690,000 in a lump
sum, he would not be subjected to the additional tax of 10% given that he is 60 years old, but the
entire amount will be treated as ordinary income and will be subject to the maximum tax bracket
(39.6%). If he opted for the lump sum, he could end up paying approximately $220,000 and only
end up with approximately $440,000 of his pension for investment in his new business.
Second, Bob stated that he has $9,000,000 worth of land. As per Publication 544, Sales
and Other Dispositions of Assets, there are various alternatives Bob can consider in order to
obtain the most benefit from the sale of his investment properties and acquisition of the potential
business location. We did research on the topic and found the following alternatives:
a. Sale of land – Bob can sell portion of the land he owns and use the proceeds towards
the new business venture. If he sells at least portion of the land, the capital gains from
the sale would be subject to a maximum tax bracket of 20%, which is almost half of
what he would be subject to if he would have received the 401(k) lump sum. For
example, let’s say that Bob sells all the land he owns for the FMV.
Sale $9,000,000
Less: Cost (450,000)
Capital gain from long-term investments 8,550,000
Times: applicable tax bracket 20%
Equals: Tax determined from the sale 1,710,000
, b. Taxable exchange – Bob can exchange the $5,000,000 worth of stocks and bonds for
the property he needs to open his business. This type of transaction is used when the
exchange of assets are not similar. The value of the property you receive will be
measured using the Fair Market Value and any gain or loss will be recognized in the
tax return.
For example, Bob exchanges his stocks and bonds for a building worth $6,000,000.
Fair Market Value of the property received $6,000,000
Less: Book value of the property given up 5,000,000
Equal: Capital gain 1,000,000
Times: Capital gain tax bracket 20%
Tax due $200,000
II. Conclusion
D. Describe the after tax effects on the client’s cash flow based on the sale of the land
that is needed to provide the funds necessary to start the business. Consider including
capital gains tax rules.
As per Publication 544, Sales and Other Dispositions of Assets, Bob can sell the lands he
owns in order to obtain cash to invest in his new business. He would only be taxed for a
20% of the capital gains resulted from this transaction. Like in the previous example, Sale
