TO: John Tutor, Senior Manager
FROM: Hui Chen, Tax Specialist HC
DATE: November 11, 2018
SUBJECT: Recommendation for MTL Corp’s Relevant Tax Issues and Advice
Our client, MTL crop, has expressed concern about tax implication about sale of an investment property. The issue is when MTL Corporation will be sell the land to defer income and accelerate deduction. Based on my analysis, MTL Corporation should not sell the land on December 28, 2017 because the constructive doctrine limited defer income. This memo includes relevant background information, a description of the tax issue and implication, and a recommendation for proper accounting of the recognize income.
Following the signing of the tax cut from 35% to 21% and Jobs Act on 22nd December 2017, that led lower income tax rates for MTL Corporation. MTL Corporation want to sell land at a cost of $340,000 and find a buyer who will pay $600,000. MTL Corporation plan to close the deal on December 28, 2017. However, the CEO want to delay the sale to 2018 to get the lower tax rate. And the buyer insists on a $10,000 discount on the sale.
The tax issue is when MTL Corporation can recognize and defer income in Internal Revenue Code (IRC) §61. Because MTL Corporation want to sell land.
The sale between MTL Corporation and the buyer is qualifying for IRC §61. If MTL Corporation sell the land on December 28,2017. The income is $260,000 and tax rate are 35%. The income after tax will be $169,000. Because of the Constructive receipt doctrine limitation, MTL cannot delay income recognition. Also, if MTL Corporation sell the land one January 1,2018. The tax rate decreases to 21% and the sale price decrease to $590,000. The income after tax will be $197,500.
To defer income and override limitation of Constructive receipt doctrine, the best option is to delay the sale until after January 1,2018. Although the sale price deceased $10,000. The income after tax increase from $169,000 to $197,500.