Federal Taxation Problem

WAR (We Are Rich) has been in business since 1983. WAR is an accrual method sole proprietorship that deals in the manufacturing and wholesaling of various types of golf equipment. Hack & Hack CPAs have filed accurate tax returns for WARs owner since WAR opened its doors. The managing partner of Hack & Hack (Jack) has gotten along very well with the owner of WAR Mr. Someday Woods (single). However, in early 2016, Jack Hack and Someday Woods played a round of golf and Jack, for the first time ever, actually beat Mr. Woods. Mr. Woods was so upset that he fired Hack & Hack and has hired you to compute his 2016 taxable income. Mr. Woods was able to provide you with the following information from prior tax returns. The taxable income numbers reflect the results from all of Mr. Woods activities except for the items separately stated. You will need to consider how to handle the separately stated items for tax purposes. Also, note that the 20112015 numbers do not reflect capital loss carryovers.

	2011			2012		2013			2014			2015
Ordinary taxable income	$	4,000		$	2,000	$	94,000		$	170,000		$	250,000
Other items not included in ordinary taxable income
Net gain (loss) on disposition of 1231 assets	$	3,000			10,000				$	(6,000	)
Net long-term capital gain (loss) on disposition of capital assets	$	(15,000	)	$	1,000	$	(7,000	)				$	(7,000	)

In 2016, Mr. Woods had taxable income in the amount of $460,000 before considering the following events and transactions that transpired in 2016:

On January 1, 2016, WAR purchased a plot of land for $100,000 with the intention of creating a driving range where patrons could test their new golf equipment. WAR never got around to building the driving range; instead, WAR sold the land on October 1, 2016, for $40,000.

On August 17, 2016, WAR sold its golf testing machine, Iron Byron and replaced it with a new machine Iron Tiger. Iron Byron was purchased and installed for a total cost of $22,000 on February 5, 2012. At the time of sale, Iron Byron had an adjusted tax basis of $4,000. WAR sold Iron Byron for $25,000.

In the months October through December 2016, WAR sold various assets to come up with the funds necessary to invest in WARs latest and greatest inventionthe three dimple golf ball. Data on these assets are provided below:

Asset	Placed in Service (or purchased)	Sold	Initial Basis		Accumulated Depreciation		Selling Price
Somedays black leather sofa (used in office)	4/4/15	10/16/16	$	3,000	$	540	$	2,900
Somedays office chair	3/1/14	11/8/16	$	8,000	$	3,000	$	4,000
Marketable securities	2/1/13	12/1/16	$	12,000	$	0	$	20,000
Land held for investment	7/1/15	11/29/16	$	45,000	$	0	$	48,000
Other investment property	11/30/14	10/15/16	$	10,000	$	0	$	8,000

d. Finally, on May 7, 2016, WAR decided to sell the building where they tested their plutonium shaft, lignite head drivers. WAR purchased the building on January 5, 2004, for $190,000 ($170,000 for the building, $20,000 for the land). At the time of the sale, the accumulated depreciation on the building was $50,000. WAR sold the building (with the land) for $300,000. The fair market value of the land at the time of sale was $45,000. (Do not round intermediate computations. Round your final answers to the nearest whole dollar amount. Loss amounts should be indicated by a minus sign.)

Compute Mr. Woodss taxable income after taking into account the transactions described above.

	Description		Gain(Loss)	Depreciation Recapture	1231	Ordinary income(Loss)	Short Term	Long Term Total	LT 28%	LT 25%	LT 0/15/20%
a	Land
b	Iron Byron
c1	Sofa
c2	Chair
c3	Marketable securities
c4	Land for investment
c5	Investment property
d1	Building
d2	Land
	1231 netting
	Step 1 depreciation recapture
	- ordinary income
	Step 2 1231 G/L netting - gains/losses exclusive of 1250
	- Unrecap 1250
	Step 3 lookback rule
	- apply to unrecap 1250 first
	Ordinary income
	Remaining unrecap 1250 25%
	Remaining gain 0/15/20
	Capital gain netting
	Step 1
	Step 2
	Step 3
	Step 4 LTCL c/o
	Subtotal
	Step 5
	Step 6
	Step 7
	Subtotal
	Step 8
	Step 9
	Total

Taxable Income:
Before Transactions	$ 460,000
Ordinary Income
LTCG @ 25%
LTCG @ 0/15/20%
Taxable Income

Compute Mr. Woods's tax liability for the year. (Ignore any net investment income tax for the year.) Use Tax rate schedules

Taxable Liability:
Tax on Ordinary Income
Tax on 25% Gain
Tax on 0/15/20% Gain (Taxes at 20%)
Total Tax Liability