Your client, Donald J. Hairdo, is an extremely successful real estate developer.

He owns most of his holdings through an S corp., Hairdo, Inc., that he formed in 2016. (You advised him not to put his investments into corporate solution, but he disregarded your advice and said you were a loser for making the suggestion.)

In 2016, Mr. Hairdo invested $100 million of cash in Hairdo, Inc. in exchange for 100% of Hairdos stock.

Hairdo, Inc. invested $75 million of cash as a down payment to purchase a number of real estate rental properties in 2016. Hairdo, Inc. was able to leverage its investment as it borrowed $300 million of qualified nonrecourse financing to acquire the properties.

In 2016, Hairdo, Inc. also invested $25 million of cash into Subprime Lender, LLC. Subprime Lender is a mortgage lender specializing in making home mortgage loans to customers who have low FICO scores. 70% of Subprime Lender LLCs profit and loss is allocable to the managing member who participates in the decisions involving running the business.

Mr. Hairdo spends approximately 1,800 hours per year actively managing the rental properties owned by Hairdo, Inc. His management activities include direct oversight of the management company, making decisions on the day to day operations of the properties, including repair costs, approving tenants, developing a marketing strategy, etc. He visits each property once or twice a month. He spends another 20 hours per year overseeing Hairdo Inc.s. Subprime Lender investment, reviewing financial statements, and discussing the overall performance with his investment advisors. In 2016 Mr. Hairdo elected under Reg. 1.469-9(g) (the grouping election) to treat all interests in rental real estate as a single rental real estate activity for the material participation tests of Temp. Reg. 1.469?5T.

In 2016 Hairdo, Inc. incurred huge losses. Its rental activities generated an ordinary loss of $110 million. Subprime Lender sent Hairdo, Inc. a Schedule K-1 showing $20 million of ordinary losses from its trade or business of lending.

Mr. Hairdo had $100,000,000 million of income from interest, dividends and stock sales in 2016

Part 1

It is now December 2017 and Mr. Hairdo has asked you to prepare a year-end tax projection. The following summarizes the information you have been provided for 2017.

During 2017, the hours worked by Mr. Hairdo, were comparable to those of 2016.

Mr. Hairdo made no capital contributions to Hairdo, Inc.

Mr. Hairdo did not receive any distributions from Hairdo, Inc.

The rental properties owned by Hairdo, Inc. generated an ordinary loss of $50 million, which was financed through an additional bank loan from a qualified lender that is affiliated with a Russian oligarch. The lender and oligarch are not related parties to Mr. Hairdothey are just good friends. The loan is collateralized by the properties.

Subprime Lender has advised Mr. Hairdo that it is having a great year and it expects to generate $3 billion of taxable income during 2017. Hairdo Inc.s distributive share of that income is expected to be $30 million.

Mr. Hairdo received $ 50 million of portfolio income during 2017. Substantially all of this income was interest income.

Assume that all of Mr. Hairdos taxable income is subject to tax at a 40% rate. Ignore itemized deductions, 199A deductions, etc. In other words compute his tax by applying a 40% rate to taxable income.

How much tax should Mr. Hairdo expect to owe for 2017?

Part 2

It is now August 2018 and you are completing the 2017 returns for Hairdo, Inc. and Mr. Hairdo.

Mr. Hairdo has just provided you with the actual 2017 Schedule K-1 that he received from Subprime Lender, LLC. After Subprime Lender prepared its year-end tax estimates, its independent auditors required that the company make substantial adjustments reducing income. It turns out that they did not have the profitable year that they were expecting and the actual Schedule K-1 sent to Hairdo Corp. shows an ordinary loss of $10 million. The Schedule K-1 shows that Hairdo Corp. was allocated nonrecourse debt of $5 million. Mr. Hairdo said Believe me this is terrificbecause, instead of reporting $30 million of income, I will report a loss of $10 million saving me a lot of money. It will be really beautiful to receive that tax refund. Mr. Hairdo is so confident that he will get a large refund of the tax he paid in December 2017 that he has booked a luxurious Mediterranean vacation on a private yacht. The yacht he is renting is exceptionally large so that he can impress all of the people in Monaco when he sails into the harbor at Monte Carlo. He plans to use the tax refund to pay for the vacation.

All other information used in the year-end projection remains unchanged.

What is Mr. Hairdos actual 2017 tax liability?