Required:

Using the space below each item, briefly identify the federal tax issue(s) and the related federal tax consequence(s) for each of the following independent factual situations. Assume cash-basis taxpayers in all situations. Assume you are the tax preparer for the taxpayers involved and they have asked you if the transactions have any ramifications for tax purposes. What would you tell them? What are the tax issues? What specific dollar impact will the transaction have on the computation of federal taxable income? What will be the character of the transaction (for example, ordinary income/deduction, capital gain/loss, 1231 gain/loss, 1245 gain, 1250 gain, etc.)? Will the transaction be taxable (deductible) for self-employment tax purposes? Are there other issues that the client should be made aware of? You are not required to prepare a letter to client or memo to file, rather just a reasonable response as reflected in the example provided. Upload your completed Word document (or PDF) by Sundaytday 12/12/21 using the link provided in the Connect assignment.

Example:

Modern Corporation (assume it is a C corporation formed and doing business in Minnesota, the type of corporation subject to the 21% federal income tax rate) sold a used pick-up truck to the company president (also the sole shareholder who is being paid a reasonable salary) for only $1,000 (a very good deal). The president planned to keep the truck at the familys lake cabin and use it mostly for hunting and fishing trips with his children. The fully-depreciated truck was originally purchased by the corporation for $30,000, and had an estimated value of $10,000 at the time it was sold to the company president. You are the tax preparer for both the corporation and the company president/sole shareholder. Are there any issues that should concern either the corporation or the president/shareholder?

The issue to be resolved is whether this bargain purchase is taxable to the president/sole shareholder. The corporation should probably be reporting a $10,000 (not $1,000) as ordinary income due to 1245 recapture on the sale (which would be taxed at 21%), and a $9,000 non-deductible dividend paid. Since the president/sole shareholder is already being paid a reasonable salary, he should be reporting $9,000 dividend income for the bargain element, which will be taxed at the lower preferential tax for qualified dividends.

1. Hector and his wife Ruth, both age 40, both worked full-time and had always filed married filing jointly. They always claimed their two children (ages 10 and 12) as qualifying children. Hector died unexpectedly in July 2016, so Ruth continued working and raising the children on her own in the family home. Assume Ruth never remarried and the children continued to be her qualifying children. What filing status will Ruth use for 2016, 2017, 2018, 2019 and 2020, if her goal is to minimize her federal tax liabilities?