John US Taxation Case Study

John US Taxation Case Study

John has a life long dream of owning a winery.  He has studied the soils and topography of both New York State and California.  It is obvious that California wine and grapes are superior to those of New York; however, there are certain grapes that are able to be grown in New York such as Riesling and Marquette that do well and have reached world acclaim.  The cost of land in California is significantly higher in grape growing regions because of the success of other vintners and as such, John has chosen to purchase a 50 acre plot of land in the Seneca Lake region of the Finger Lakes in New York.  The soil is very conducive to growing grapes according to a study performed by Cornell’s agriculture management group.  The 50 acre purchase has taken most of John’s available cash and so he may need to take on a partner in this venture down the road.  Further, he is always open to bringing on other partners in the venture who can bring expertise that John doesn’t have.Question                                                         35 Points

John has created an incredibly successful wine operation in the Northeast.  He has vineyard lands along the Seneca and Cayuga wine trails in the Finger Lakes of New York.  In all, there are 5 different wineries operations each in a different corporation.  All 5 are in a separate S-Corporation with all the stock owned by the parent Company Petosa Vineyards Inc, also an S-Corporation.  John and his wife Jennifer own 75% of the stock of the parent Company which means they own 75% of all of the value of the entities.  John’s brother, Tom became a partner in the business providing much needed capital when the wineries were in a growth stage.  Tom owns 20% of the remaining stock and he has 2 children who work at the winery on weekends doing wine tasting, but have other jobs during the week.  Jennifer’s sister Karen owns the remaining 5% of the outstanding shares. All the land is owned by John and Jennifer in separate LLC’s.  Each LLC charges the respective S-Corporations rent for the use of the land.  The rent charged is usually enough to cover the cost of the real estate taxes, insurance and mortgage on the properties.  However, 2 of the LLC’s have loss carryforwards since they just started operations and the business end of the winery could not afford a fair market rent.  The LLC’s elected to be treated as partnerships.  Jennifer and John have included their children as minority owners of the LLC’s.

Specific requirements based on the information provided in Tables 1, 2 and 3 compute the following:

  1. Using the information provided, compute the 2019 tax return for John and Jennifer based on the S corporation and the LLC’s activity.  Be sure to show line item detail of the 1040 and any supporting schedules.  You may use the actual forms but it is not necessary.  John and Jennifer use the standard deduction and have no other income items such as interest, dividends etc. outside of the information provided in the tables.
  2. Compute the overall tax effect if the S corporations were C corporations including the revised individual income tax consequence to John and Jennifer.  Comment on the effect.
  3. Compute the overall tax effect if all the S corporations, and the LLC’s are taxed as C corporations including the revised individual income tax consequence to John and Jennifer.  Comment on the effect.
  4. Do you recommend any additional entity revisions to lower John and Jennifer’s overall tax consequence in light of the new tax law changes?
  5. Returning to the original scenario, if John and Jennifer were interested in funding the $4,000,000 expansion of the Tennity Ice Pavilion to include a lacrosse and baseball field to further the Men’s club hockey, lacrosse and baseball programs in honor of their three sons who were all the captains of their respective teams while attending Syracuse University how would this potentially impact their current or future tax returns and tax liability?

Assume that John and Jennifer use the standard deduction on their personal return, since they live on the winery property and have no separate mortgage or interest expense

Be sure to take advantage of any credits available using the new tax laws and consider all sales from the winery business to qualify as domestic production activity.

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