Mr. Howard Reed, a successful local contractor, would like your advice on the best way to achieve several desired personal results and minimize payment of federal income taxes. Mr. Reed, who is a widower with an adult son and daughter, has been very successful as a contractor and can’t resist reminding all assembled of his success. He’s fond of remarking, “For the last ten years I’ve been in the highest income tax bracket.” Early this year Mr. Reed decided that for health reasons he should retire by the end of the year and would like to liquidate all his business holdings which are worth approximately $1,500,000. His business assets, exclusive of cash and accounts receivable, consist almost entirely of Internal Revenue Code (IRC) section 1231property. Mr. Reed estimates that this year, exclusive of any gains or losses produced by selling his construction business which he operates as a sole proprietorship, he will have net taxable income of $200,000 from his investments and construction activities and that in retirement his annual net taxable income which will be derived from investments, will amount to approximately $60,000. Mr. Reed also estimates that the Internal Revenue Code (IRC) section 1231property losses produced by selling his construction business will amount to approximately $50,000 and the Internal Revenue Code (IRC) section 1231property gains to approximately $160,000 for a net gain of $110,000. All the interest purchasers are financially sound, and Mr. Reed has already informed several that he’d be willing to take their personal notes rather than immediate cash payment. Since his retirement income will be much less than the income to which he has been accustomed Mr. Reed is interested in maximizing his retirement income. Like most retired persons, he is more concerned with a source of steady income than he is with the possibility of long term appreciation.
Mr. Reed also feels that, in order to minimize his taxable estate, it might be desirable to transfer some property to his son and daughter either now or in the next few years, and would like your advice as to the effect of transferring:
(1) construction company assets;
(2) proceeds of a sale of such assets;
(3) bonds which he has purchased as an investment.
In addition to your own legal research, you may wish to consider Rev. Rul. 68-13, 1968-1 C.B. 195 and B.A. Veenkant v. Comm., 416 F.2d 93 (6th Cir. 1969).