It is fact pattern with many tax issues. The most important part is to spot the issues presented by the fact pattern and believe me there are lots of tax issues. You may actually have to perform a little bit of research through RIA Checkpoint to find some of the answers.

One of the purposes of the assignment is to check the level of your observation and analysis of fact patterns in tax and tax related transactions. What may appear on the surface as an innocent transaction may very well have significant tax consequences.

This is a test of not necessarily solving the problem correctly (though that does get you extra points) but finding the problems. Half of the tax battle is determining the issue then applying the law and calculating the tax. Computer programs do a good job of calculating the tax but it is up to us to determine the issues by using our judgment.

Find the tax problems:

Han and Leia acquired a $1,475,000 lakefront home from Boba Fett Realty in

2010. They exchanged their principal residence, townhouse in Coruscant, for

the Lake Tatooine property. They paid $700,000 in cash for the townhouse in

2007 and it was recently appraised for $1,400,000.

The gorgeous 30-acre lakefront property on Lake Tatooine has incredible

views and vistas of the Dune Sea and the Greedo Mountains. In 2018 the

Village of Mos Eisley valued the property at $2,150,000 and assessed real

property taxes on the both the home and the outparcels of property. Jobba

the Assessor determined that the home represented 30% of the value and the

out-parcels represented the remaining 70% of the value for the property.

The Solos hired Storm and Trooper Construction Company (S&TCC) to repair

and remodel the existing home. Force Architectural and Engineering was

retained to perform feasibility and design for the renovation. However their

investigation revealed a vermin infested and termite eaten home on the

property that had been built a long, long time ago. Forces lead architect Yoda

warned the Solos that the home was too old to be rehabbed and the cost

prohibitive. It seems that the old lakefront home never really fit the Solos

entertaining and galaxy trotting lifestyle. So they decided to demolish the

home and built their dream stone and log cabin. In addition, they wanted a

hanger and landing strip for the Millennium Falcon.

S&TCC estimated that it would cost $25,000 to $50,000 to demolish the

home. All the necessary permits to demolish the home were obtained from

the Village of Mos Eisley but Han balked at the cost of demolition. Han and

Leia donated the home to the Mos Eisley Rebellion Fire Departments

(MORFED) for a training exercise. On October 1, as part of fire prevention

month, MORFED burned down the structure and then put out the fire.

MORFED charged Han and Leia $2,000 to haul away the burned out remains

of the old home.

A construction contract to built the home, a hanger with offices and a landing

strip was signed with S&TCC on January 15, 2018. The cost of building the

home is $1,250,000. They paid 20% of the cost in cash and borrowed the

balance from the Next Empire and Republic Bank (NERB) with a construction

bridge loan at 6.25% per annum secured by the property. Construction on

the home was completed on August 20, 2018 and the Solos executed a 30-

year home mortgage loan secured by the principal residence at 4.35% per

annum with NERB on September 22, 2018.

Separately, Han entered into a construction contract with S&TCC to build the

hanger with offices and the airstrip on February 1, 2018. The hanger with

offices and the airstrip houses Galactic Shipping LLC (GSLLC). The cost of the

hanger with offices is $1,600,000. GSLLC will borrow 90% of the

construction cost of the hanger with offices from NERB on a ten year note at

a below market rate of interest of 1.625%. Han sand Leia are personally

guaranteeing the loan from NERB to GSLLC. The landing strip will cost

another $1,245,000 to build. Han and Leia have decided to subdivide some of

the 30-acre property to finance the building of the landing strip. They

anticipate that they can sell six (6) two-acre lots for $389,000 apiece through

BFR that is charging a 5% commission. BFR sold all six lots in 2014.

GSLLC is owned by Han and Leia 50-50. Han owns 1% managing

membership and 49% limited membership while Leia owns 50% limited

membership. Han actively manages the shipping business. Due to increased

insurance and energy costs GSLLC lost $39,000 in 2018.

Leia is uninterested in the business and is more interest in saving the planet

from destruction. Unknown to Han, Leia donated his antiques blasters to

Stop the Sith Foundation. (StSF) Han paid $160,000 for the prized pieces and

they are conservatively valued at ten (10) time the purchase price. She also

made a pledge to StSF in the amount of $200,000. She gave them a check in

the amount of $35,000 on December 31, 2018.

Han is considering the purchase of new droids to replace two old droids he

purchased for $10,0000 apiece from Jawa Equipment Distributing Inc. (JEDI)

in 2012. JEDI will give Han $2,000 apiece for a trade-in on the purchase of

two new droids. The new droids will cost $20,000 apiece and will be used for

business. The old droids have always been used for personal purposed and

not business.

Han and Leia also have a small get-away place in Endor Estates that they rent

out occasionally (13 days in 2018) for $1,000 per day. They lived there the

entire time that their new home on lake Tatooine was being built. BFR

approached them about renting the vacation home for 100 days during 2018.

There would be a management charge of 18.5% of rental income by BFR. The

management charge would cover advertising for guests, routine maintenance

and housekeeping.

Hans old buddy Lando has been promoting oil and gas mining ventures and

has asked him to invest in Bespin LLC which currently is operating at a loss.

Han invested $10,000 in the mining interest on March 30, 2016 and it threw-

off a $1,000 loss to him in 2016. Heeding Leias advice, Han instructed his

broker to sell the Bespin LLC shares on March 28, 2018. The broker did not

get the trade order into the system so that the shares were not actually sold

until April 2, 2018. The selling price was $16,300. The broker charged Han a

3% commission to sell the shares in Bespin LLC.

Leia purchased 1000 shares of stock in Wookie World for $22 per share on

November 4, 2013. Slowly but surely the fair market value of the stock rose

over the next couple of years. On June 7, 2018 Leia sold fifty percent (50%) of

her shares in Wookie World for $57 per share. On July 12, 2018 Leia bought

200 shares of Light Sabers Enterprises Inc. (LSEI) for $19 per share but sold

them on July 24, 2018 for $18 per share. By August 1, 2018 when Leia

repurchased 200 shares of LSEI the share price had dropped to $14 per

share. She was sure that the price would turn around and by December 18,

2018 LSEI was trading at $34 per share. Afraid that another correction

would take place Leia sold all of her LSEI holding on December 27, 2018 for

$36 per share.

Han and Leia have come to you for tax help for their 2018 tax year. What

issues does their set of facts present to you as their tax advisor? What advice

do you have for them? Please make any assumptions that you need in order

to address and respond to the issues presented by the fact pattern. Clearly

state the assumptions that you make. It is advisable to utilize a memorandum

style in which you address the facts, issues, analysis and conclusions. Support

your answers with cites to code, regulations, cases, rulings, IRS publications

or other research data. Unsupported conclusions without proper analysis

will not win you points with the firms senior partner (me). Good luck.