## Mabel and Alan, who are in the 32% tax bracket,

Mabel and Alan, who are in the 32% tax bracket, recently acquired a fast-food franchise. Both of them will work in the business and receive a salary of \$175,000. They anticipate that the annual profits of the business, after deducting salaries, will be approximately \$450,000. The entity will distribute only enough cash each year to Mabel and Alan to cover their Federal income taxes associated with any flow-through income from the franchise. Any remaining profits will be reinvested in the business.
a. What amount will the entity distribute if the franchise operates as a C corporation?
b. What amount will the entity distribute if the franchise operates as an S. corporation.?
c. What will be the amount of the combined entity/owner tax liability in parts (a) and (b)’

## Jane and Robert Brown are married and have eight children,

Jane and Robert Brown are married and have eight children, all of whom are eligible to be claimed as the couple’s dependents. Robert earns \$196,000 working as a senior manager in a public accounting firm, and Jane earns \$78,000 as a second-grade teacher. Given their large family, they live in a frugal manner. The Browns maintain a large garden and some fruit trees from which they get most of their produce, and the children take family and consumer science classes so that they can help make the family’s clothing.
The Browns record no gross income other than their salaries (all of their investment income is earned from qualified retirement savings), and their itemized deductions are less than the standard deduction. In addition, they incur no additional adjustments or preferences for AMT purposes.
a. What is the couple’s 2018 regular tax liability?
b. What is the couple’s 2018 AMT?
c. Express the calculation of the couple’s AMT for 2018 as an Excel formula. Place any parameter that could change annually in a separate cell, and incorporate the cell references into the formula.

## Gabriel, age 40, and Emma, age 33. are married with

Gabriel, age 40, and Emma, age 33. are married with two dependents. They recorded AGI of \$250,000 in 2018 that included net investment income of \$3,000 and gambling winnings of \$2,500.
The couple incurred the following expenses during the year (all of which resulted in itemized deductions for regular income tax purposes).
Medical expenses (before 7.5%-of-AGI floor)  ………………………………………………………………….. \$12,000
State income taxes …………………………………………………………………………………………………………..     5,800
Real estate tax ………………………………………………………………………………………………………………….     9,100
Interest on personal residence …………………………………………………………………………………………   18,600
Interest on home equity loan (proceeds were used to remodel the couple’s kitchen) ……….     9,800
Investment interest expense ……………………………………………………………………………………………      4,500
Charitable contribution (cash) ………………………………………………………………………………………….   14,200
a. What is Gabriel and Emma’s AMT adjustment for itemized deductions in 2018? Is it positive or negative?
b. Gabriel and Emma also earned interest of \$5,000 on private activity bonds that were issued in 2014. They borrowed money to buy these bonds and paid interest of \$3,900 on the Joan. Determine the effect on AMTI.

## Allie, who was an accounting major in college, is the

Allie, who was an accounting major in college, is the owner of a medium-size construction limited liability company. She prepares the company’s Schedule C each year. Due to reporting a home construction contract using the completed contract method, the is subject to the AMT in 2018. Allie files her 2018 tax return in early February 2019. Her total tax liability is \$58,000 (\$53,000 regular income tax liability + \$5,000 AMT). Assume that Allie is in the 37% tax bracket.
In early March, Allie reads an article on minimizing income taxes. Based on this article, she decides that it would be beneficial for the company to report the home construction contract using the percentage of completion method on its 2018 return. Although this will increase her 2018 income tax liability, it will minimize the total income tax liability over the two-year construction period. Therefore, Allie files an amended return on March 14, 2019. Evaluate Allie’s actions from both a tax avoidance and an ethical perspective.

## Lilia is going to be subject to the AMT in

Lilia is going to be subject to the AMT in 2018. She owns an investment building and is considering disposing of it and investing in other realty. Based on an appraisal of the building’s value, the realized gain would be \$85,000.
Two individuals have indicated an interest in buying the building, Ed and Abby. Ed has offered to purchase the building from Lilia with a December 29, 2018 closing date. Ed wants to close the transaction in 2018 because he will receive certain beneficial tax consequences only if the transaction is closed prior to 2019. Abby has offered to purchase the building with a January 2, 2019 closing date.
The adjusted basis of the building is \$95,000 greater for AMT purposes than for the regular income tax. Lilia expects to be in the 37% regular income tax bracket. What are the relevant Federal income tax issues that Lilia faces in making her decision?

## Bill and Mary filed a joint Federal income tax return

Bill and Mary filed a joint Federal income tax return this year. Mary owns a 30% interest in MAJIC Partnership, a women’s dress boutique. Mary’s share of the partnership’s net income is \$280,000. Her shares of the partnership’s W-2 wages and unadjusted basis of depreciable property are \$100,000 and \$300,000, respectively.
a. What is Bill and Mary’s maximum QBI deduction if their total taxable income is \$300,000?
b. What is the maximum QBI deduction if Bill and Mary’s total taxable income is \$450,000?
c. What is the maximum QBI deduction if MAJIC’s income was from qualified services and Bill and Mary’s total taxable income was \$450,000?

## Ryan Ross (111-11-1112), Oscar Omega (222-22-2222), Clark Carey (333-33-3333). and

Ryan Ross (111-11-1112), Oscar Omega (222-22-2222), Clark Carey (333-33-3333). and Kim Kardigan (444 44 4444) are equal active members in ROCK the Ages 11.C. ROCK serves as agent and manager for prominent musicians in the Los Angeles area. The LLC’s Federal ID number is 55-5555555. It uses the cash basis and a calendar tax year, and it began operations on January 1, 2004. Its current address is 6102 Wilshire Boulevard, Suite 2100, Los Angeles, CA 90036.
ROCK was the force behind such music icons as Rhiannon, Burgundy Six, Elena Gomez, Tyler Quick, Queen Bey, and Bruno Mercury, and it has had a very profitable year. The following information was taken from the LLC’s income statement for the current year.

During the past few years, ROCK has taken advantage of bonus depreciation and § 179 deductions and fully remodeled the premises and upgraded its leasehold improvements. This year, ROCK wrapped up its remodeling with the purchase of \$20,000 of office furniture, for which it will claim a § 179 deduction. ROCK uses the same cost recovery methods for both tax and financial purposes. There is no depreciation adjustment for alternative minimum tax purposes. ROCK invests much of its excess cash in non-dividend-paying growth and tax-exempt securities. During the year, the LLC sold two securities. On June 15, ROCK purchased 1,000 shares of Tech, Inc. stock for \$100,000; it sold those shares on December 15, for \$80,000. On March 15 of last year, ROCK purchased 2,000 shares of BioLabs, Inc. stock for \$136,000; it sold those shares for \$160,000 on December 15 of the current year. These transactions were reported to the IRS on Forms 1099- B; ROCK’s basis in these shares was reported on the form.
Net income per books for the current year is \$840,000. On January 1, the members’ capital accounts equaled \$200,000 each. No additional capital contributions were made during the year. In addition to their guaranteed payments, each member withdrew \$250,000 cash during the year.
ROCK’s book as of December 31 of this year is as follows.

All debt is shared equally by the members. Each member has personally guaranteed the debt of the LLC. All of the owners are active in ROCK’s operations.
The appropriate business code for the entity is 711410. For the Form 1065 page 5 Analysis of Net Income, put all amounts in cell 2(b)(ii). The LLC’s Form Io65 was prepared by Ryan Ross and sent to the Ogden, UT, IRS Service Center.
a. Prepare pages 1, 4, and 5 of a Form 1065 for ROCK the Ages LLC. Use tax-basis data in completing Schedules L and M-2. Include any information the LLC members might need including information for § 199A calculation. Use 2018 tax rules. If available use 2018 tax forms.
b. If you are using tax return preparation software, prepare Form 4562 and Schedule D.
c. Prepare Schedule K-1 for Ryan Ross, 15520 W. Earlson Street, Pacific Palisades, CA 90272.

## The JM Partnership was formed to acquire land and subdivide

The JM was formed to acquire land and subdivide it as residential housing lots. On March 1, 2018, Jessica contributed land valued at \$600,000 to the in exchange for a 50%. interest. She had purchased the land in 2010 for \$420,000 and held it for investment purposes (capital asset). The holds the land as inventory.
On the same date, Man contributed land valued at \$600,000 that he had purchased in 2008 for \$720,000. He became a 50% owner. Man is a real estate developer, but he held this land personally for investment purposes. The holds this land as inventory.
In 2019, the sells the land contributed by Jessica for \$620,000. In 2020, the sells the real estate contributed by Man for \$580,000.
a. What is each partner’s initial basis in his or her interest?
b. What is the amount of gain or loss recognized on the sale of the land contributed by Jessica? What is the character of this gain or loss?
c. What is the amount of gain or loss recognized on the sale of the land contributed by Matt? What is the character of this gain or loss?
d. How would your answer in part (c) change if the property were sold in 2025?

## George is a U.S. citizen who is employed by Hawk

George is a U.S. citizen who is employed by Hawk Enterprises, a global company. Beginning on June 1, 2018, George began working in London. He worked there until January 31, 2019, when he transferred to Paris. He worked in Paris the remainder of 2019. His salary for the first five months of 2018 was \$100,000, and it was earned in the United States. His salary for the remainder of 2018 was \$175,000, and it was earned in London.
George’s 2019 salary from Hawk was \$300,000, with part being earned in London and part being earned in Paris. What is George’s gross income in 2018 and 2019 (assume that the 2019 indexed amount is the same as the 2018 indexed amount)?

## Sean Moon is president, secretary, treasurer, sole director, and sole

Sean Moon is president, secretary, treasurer, sole director, and sole shareholder of Srreerz, an S real estate company. He manages all aspects of the company’s operations, and he is the only person working at the company that holds a real estate broker’s license. Sean works 12-hour days and rakes few days off. Corporate records indicate the following.

Sean and his wife, Kim, filed joint Federal income tax returns, but they did nor report any wages or salaries on their returns. During 2019, Sean transferred \$240,000 from Streetz to his personal account.

You are an expert witness for the IRS. Identify the items that you would present to the U.S. Tax Court with respect to the amount of Sean’s compensation that is subject to employment taxes and any other taxes due for 2019 (especially the additional Medicare net investment income tax). Hint: This is a reasonable compensation issue