TAX 630 Real Estate Taxation OAX789) Oliver Wendell Douglas (Age 70) and Lisa Hofry Douglas
Real Estate Taxation OAX789)Summer 2016Exam INameQuestiont. 6spoints).Oliver Wendell Douglas (Age 70) and Lisa Hofry Douglas (age 42), husband and wife, own aI25 acle farm named "Green Acres" in your state. They raise albino rats for scientific researchstudies and organic jackalopes for the sale of meat to heaith food stores. They purchased thefarm in 1958 for $30,000 and immediately placed the fann in their state’s "clean and green"agricultural properfy tax reduction program.Mr. Douglas is an attorney who specializes in the adoption of Eskimo children from the NorthPole. He openly confesses that even though he is an attorney, he knows very little about taxes.His law office occupies approximately 1,000 square feet of space on the third floor attic of hispersonal residence, a 10 bedroom Victorian home. The Victorian home is about 10,000 sqruuefeet in total of which 1,000 squa.re feet of space is allocated for personal use by the Douglas’sand the remainder is occupied by the "Freezing Valley Bed and Breakfast" that is operated byItdrs. Douglas, The Victorian home is a designated historical landmark and is in need of repair.lv{r. Douglas incorporated the fann in 1960 for tax purposes and has never elected S Corporationstatus. The rats are held in a separate, specially constructed barn on an acre of land that Mr.Douglas had inherited from his father in 1970. The acre of land is not part of Green Acres but isadjacent.to it. The value of the one acre plot of land was $3,000 on his Father’s date of death.The four JackALopes currently live in Dougias’s three car garage attached to their Victorianhome.ln 1971, lv{r. Dougias formed the DS Partnership with Igloo Snow, an attorney located in theNorth Pole. Mr. Snow contributed $1 to the paffnership for al0/o interest in DS and Mr. Douglascontributed the one acre plot of land for a99Yo ilterest in DS. DS immediately entered into anagreement with Donald Trump, a real estate developer, for the sale of the one acre parcel for$ 1,000 and the promise to immediately lease the one acre plot back to DS under a "triple netlease" arrangement for 10 years. The agreement specifically provided for DS to be able toconskuct a specially designed bam on the properfy for raising rats.Earlier this year, the Douglas’s were approached by Mr. Haney of the Global Oil Corporation(Texas based) who would like to have the Douglas’s sign a lease for a gas well to be placed ontheu farm for the purpose of drilling for natural gas through a "fracking" process. They signed alease in January which provided them with a $30,000 siguon bonus and a 12% anmalroyaltypayment. Mr. Haney would also like for the Douglas’s to sign a 30 year lease to have a waterrecycling plant (to recycle the tremendous amount of water used in the fracking process)constructed on their properfy. The Douglas’s received a partial royalty payment of $851 inNovember.At the advice of Attorney igloo Snow, the Douglas’s formed the OL Corporation on January 1,under Alaska law, for the sole purpose of receiving the lease payments under the recycling plantlease agreement which they entered into on New Yeat’s Eve in Juno, Alaska aftet drinkingheavily. The Douglas’s ouryr one share of stock (jointly) in OL Corporation and the other 99shares are owned by 99 relatives of Igloo Snow. Each share has a par value of $1 and each sharerepresents $1 ofcontributed capital for a totai contribution of$100 ($1 @ 100). The corporationreceived SCorporation status effective on January 1 and the Shareholders desire a July 1 June30 fiscal year for the corporation.In January of the following year, Mr. Douglas was informed by his physician that Mr. Douglashas a serious life threatening allergy to Jackalopes and must relocate to a different area if hewants to stay alive. The physician strongly suggested that the Douglas’s move to climate that haswasa long, cold winter. This was wonderful news for Mrs. Douglas to hear because shepreparing to teil N4r. Douglas that she wanted a divorce from him because she had been havingan affair with Mr, Haney and was pregnant with Mr. Haney’s child’Unfortunately, the Douglas’s had also recently purchased an adjacent three acre parcel for thepurpose of building a stateoftheart facility for the JackAlopes. Mrs. Douglas’s divorceutto*.y did not ttrink that this was a problem and suggested that they perform a likekindnotexchange of the three acre parcel for a similar plot in colder climate. She obviously didrcalizeMr, Douglas would not be relocation the JackAlopes’The Douglas’s have come to you for tax advice. How would you advise them?please draft a letter to the Douglas’s advising them as to how they should proceed. Please be sureto include all relevant citations and supporting documentation including relevant IRC sections,Regulations, state law, Revenue Rulings, etc. A copy of each or yow supporting documentsshouid be placed in your attached working paper files’Question 2. (20 points).Using the facts from question i, prepare an engagement letter to the Douglas’s outlining thescope of your work, your proposed fees and the timeline to complete your work’Question 3. (15 points).Using the facts from question 1, prepare a detailed letter to the Douglas’s requesting thedocuments that you will need from them to perform yotr duties.I{istorical Data:Mr. Douglas was informed by his physician that he has a serious illness in January of 2016.SCorporation status is effective January I,2076.The Douglas’s have always filed joint tax returns.The Douglas’s only child (Delilah Dawn Douglas) died immediately after birth in 2000 due tofreezing in the Igloo in which she was born.Mr. Douglas forgot to purchase life insurance and has never had any.Mrs. Douglas has no insurance on her life.Mrs. Douglas dances for tips (cash only) at her church 0n Tuesday nights but has never reportedthe income.The Freezing Valley Bed and Breakfast has always generated net losses (total of $125,000) sinceit was started :u:r2004.The rat and JackALope businesses have always generated net losses since they were started in2003 (totaling $50,000).All losses have been used to offset IzIr. Douglas’s net income from his law office which hasgenerated aR average net income of $100,0001year since he graduated from Law School in 1969.I{r. Douglas started receiving Social Secwity benefits when he turned age 65 but neverpurchased any health insurance during his life.The Douglas’s have never established a retirement plan and have no savings or investments otherthan $20,000 of cash (all ones) that is kept in their freezer.
