Rick Cabela, a high income client, has contacted you for
advice regarding two new pro – posed business ventures and other tax planning
ideas. Rick already operates a highly successful consulting business that earns
approximately $2,000,000 net after expenses, and he reports this amount on his
personal income tax return. Below are the details: 1:1-51
• Rick is considering the purchase of several apartment
buildings for rental purposes. He believes the apartments would generate a tax
loss of approximately $100,000 in each of the first three years, then operate
profitably thereafter. Rick would like to use the tax losses for the first
three years to reduce his personal income taxes.
• Rick is also considering investment in a blueberry farm.
He intends to purchase some farmland and turn it into a blueberry farm. The
costs in the first year would be the land, equipment, blueberry plants, and
labor to develop the farm. In years 2-4, labor costs and maintenance would be
the primary financial outlays. No revenue would be earned until year 5 when
Rick believes the farm will be very profitable, generating net profits of
approximately $100,000 per year. With the substantial cash outlays in the first
four years and very little revenue, Rick believes the tax losses would reduce
his personal income taxes. Assume the farm is a valid business and Rick
materially partici – pates in the activity of the farm.
• Because of his high income, Rick’s income tax liability is
very high. He read in a financial journal that the contribution of appreciated
stock to a charitable organization is a good idea for tax purposes. He has some
stock in Apple Co. for which he paid $10,000 several years ago, and the shares
are now worth $200,000. For each of the situations above, what are the
principal tax issues that Rick should consider?
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