Tom and AliceHoneycutt, ages 35 and 36, 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 associatedwith Alice’s accounting practice for 2017 are as follows:

Revenues (cash receipts during 2017) …………………  $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 2017, 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 2017:

Utilities ……………………………………………   $4,500

Insurance …………………………………………    2,100

Property taxes ……………………………………    5,200

Repairs ……………………………………………    3,500

Tom and Alice purchased the house on September 1, 2016, for $400,000 (exclusive of land cost).

Tom and Alice have one child, Connor, age 16. Connor’s Social Security number is 123-45-6788.

Tom received a salary of $50,000 during 2017. 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.

Alice provides part of the support of her father, age 69. Her father’s Social Security number is 123-45-6787. The total support in 2017 for her father was as follows:

Social Security benefits …………………………     $5,200

From Alice ……………………………………..           3,200

From Bob, Alice’s brother ……………………..         2,200

From Susan, Alice’s sister ………………………       2,300

Bob and Susan have both indicated their willingness to sign a multiple support waiver form if it will benefit Alice.

Tom and Alice’s allowable itemized deductions during 2017, excluding any itemized deductions related to the house, were $11,000. They made estimated tax payments of $25,000.

Part 1—Tax Computation

Compute Tom and Alice’s lowest net tax payable or refund due for 2017.

Part 2—Tax Planning

Tom and Alice have 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 was recently 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. Ultimately, they would like to build a vacation home on the Colorado property. 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 marginal tax rate to remain the same for 2018. Write a letter to Tom and Alice that contains your advice on the proposed transactions. Also prepare a memo for the tax files.