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TAX 650 Final ProjectCase:You are currently working.at a mid-sized certified public accounting firm. Your client isBob Jones. Bob, age 60 and single, has recently retired from IBM. He has $690,000 available inhis 401(k) fund and he is thinking of using that money to open a used car business that will belocated at 210 Ocean View Drive in Pensacola, Florida. Bob has estimated that the businessmight 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 asole proprietor, a partnership, an S corporation, or a C corporation. He is also consideringtransferring a possible 40% interest in his new business to his daughter Mandy, age 23 andsingle. Milestone One: Gross Income and Capital GainsI.MemorandumE. Calculate the property disposition capital gains and taxation of gross income. Identifythe tax consequences on the sale or exchange of the land consistent with capital gainrules. Consider the selling expense, broker’s fees, closing costs, appraisals, and surveysand the correct schedule form to complete.
First, Bob had stated he wanted to use the amount he has available in his 401(k) towardsthe used car business. As per Publication 575, Pension and Annuity Income, considering thatBob’s contributions to the 401(k) may have been pre-tax and he receives the $690,000 in a lumpsum, he would not be subjected to the additional tax of 10% given that he is 60 years old, but theentire 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 onlyend 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, Salesand Other Dispositions of Assets, there are various alternatives Bob can consider in order toobtain the most benefit from the sale of his investment properties and acquisition of the potentialbusiness 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 towardsthe new business venture. If he sells at least portion of the land, the capital gains fromthe sale would be subject to a maximum tax bracket of 20%, which is almost half ofwhat he would be subject to if he would have received the 401(k) lump sum. Forexample, let’s say that Bob sells all the land he owns for the FMV. Sale$9,000,000Less: Cost(450,000)Capital gain from long-term investments 8,550,000Times: applicable tax bracket20%Equals: Tax determined from the sale1,710,000
b.Taxable exchange – Bob can exchange the $5,000,000 worth of stocks and bonds forthe property he needs to open his business. This type of transaction is used when theexchange of assets are not similar. The value of the property you receive will be