Tom and Alice Honeycutt, ages 45 and 46, respectively, live at 101 Glass Road, Delton, MI 49046. Tom is a county employee, and Alice is a self-employed accountant. Tom’s Social Security number is 111-11-1111; Alice’s Social Security number is 123-45-6789. The income and expenses associated with Alice’s accounting practice for 2019 are as follows:

Revenues (cash receipts during 2019) ..................... $185,000
Expenses
Salaries ................................................................................. $ 45,000
Office supplies ......................................................................... 3,200
Postage ...................................................................................... 2,900
Depreciation of equipment ............................................. 42,000
Telephone .................................................................................... 800
.................................................................................................. $ 93,900

Because Alice is a cash method taxpayer, she does not record her receivables as revenue until she receives cash payment. At the beginning of 2019, her accounts receivable were $48,000, and the balance had decreased to $8,000 by the end of the year.

Alice used one room in their 10-room house as the office for her accounting practice (400 square feet out of a total square footage of 4,000). They paid the following expenses related to the house during 2019:

Utilities ................................. $4,500
Insurance ............................... 2,100
Property taxes ...................... 5,200
Repairs ................................... 3,500

Tom and Alice purchased the house on September 1, 2018, for $400,000 (exclusive of land cost).

Tom and Alice have one child, Connor, age 18. Connor’s Social Security number is 123-45-6788.

Tom received a salary of $50,000 during 2019. The appropriate amounts of Social Security tax and Medicare tax were withheld. In addition, $5,000 of Federal income taxes and $2,000 of state income taxes were withheld.

Tom and Alice’s allowable itemized deductions during 2019, excluding any itemized deductions related to the house, were $20,600. They made estimated Federal income tax payments of $20,000.

Part 1—Tax Computation

Compute Tom and Alice’s lowest net tax payable or refund due for 2019.

Part 2—Tax Planning

Tom and Alice own 30 acres of prime farmland that they inherited from Tom’s father several years ago. At that time, the fair market value of the land was $150,000 (which became their basis in the land). The Honeycutts have been holding the land as an investment. The property recently was appraised for $190,000, and there is an outstanding mortgage on the land of $28,000. They are considering trading this land for property in the mountains of southern Colorado. The Colorado property owner—who has significant land holdings in the area—has provided two options to Tom and Alice (in both cases, the Colorado property owner would assume the mortgage as part of the exchange).

1. 15 acres of property with a fair market value of $135,000 plus $27,000 of cash or

2. 10 acres of property with a fair market value of $160,000 plus $2,000 of cash

The Honeycutts have come to you for advice, believing either transaction to be a like-kind exchange that will allow them to defer any gain. Assume that Tom and Alice expect their 2020 taxable income to be about the same as in 2019 (with any net capital gain taxed at a 15% rate). Write a letter to Tom and Alice that contains your advice on the proposed transactions. Prepare a memo for the tax files, addressing pertinent matters.