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. During the summer of 2019, college student Jason worked for his uncle, a painting contractor, for two weeks, and was paid $1,600 cash for his help painting a house for one of his uncles customers. At the end of 2019, his uncle filed a Form 1099MISC indicating he had paid non-employee compensation of $1,600 to Jason (copies of the form were sent to Jason and the IRS). When it came time to file his 2019 income tax return, the tax software indicated he had to pay self-employment tax (in addition to income tax) on the $1,600 payment received from his uncle. You did some research online and found one primary authority (only one), a Tax Court case (John A. and Mary L. Batok vs. Commissioner) that seemed to indicate a one-time job was not considered regular or continuous and thus did not rise to the level of a trade or business subject to self-employment tax. Contacting the IRS to ask how to handle this issue is not an option. Should Jason pay self-employment tax on the $1,600? Is there a way he could report the $1,600 on his return without paying self-employment tax that may avert questions from the IRS, and not get him (or you) a penalty if the IRS subsequently audits him and determines self-employment tax should apply? In answering this question, use only the information provided (do not research further; assume this the only information you can find).