Tax Project

problems.pdf

Home >Business & Finance homework help >Accounting homework help >Tax Project

PRINTED BY: Christopher Hull <[email protected]>. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

he donate the stock directly? Compute the net tax benefit from each alternative and explain the difference. (Ignore the 3.8% tax on the net investment income of high-income taxpayers for this comparison.) I:7-62 On December 1, 2015, Rebecca Ward, a single taxpayer, comes to you for tax advice. At the end of every year, she do‐ nates $5,000 to charity. She has no other itemized deductions. This year, she plans to make her charitable donation with stock. She presents you with the following information relating to her stock investments:

Corpora‐ tion

FMV on Dec. 1

Adjusted Ba‐ sis

Date Pur‐ chased

Sycamore 9,600 7,800 5/22/10

Oak 2,900 3,800 9/10/11

Redwood 5,400 4,900 6/15/15

Which stock should Rebecca donate to charity? What other tax advice would you give her?

Tax Form/Return Preparation Problems

I:7-63 Following is a list of information for Peter and Amy Jones for the current tax year. Peter and Amy are married and have three children, Aubrynne, Bryson, and Caden. They live at 100 Main Street, Anytown, USA 00000. Peter is a lawyer working for

a Native American law firm. Amy works part-time in a genetic re‐ search lab. The Jones’ Social Security numbers and ages are as follows:

Name S.S. No. Age

Peter 111-11-1111 32

Amy 222-22-2222 28

Aubrynne 333-33-3333 5

Bryson 444-44-4444 3

Caden 555-55-5555 1

Receipts

Peter’s salary $70,000

Amy’s salary 32,000

Interest income on municipal bonds 2,400

Interest income on certificate of deposit (Universal Savings)

3,100

Dividends on GM stock 1,600

Disbursements

Eyeglasses and exam for Aubrynne $ 600

Orthodontic work for Bryson to correct a congenital defect

2,500

Medical insurance premiums, after-tax basis 1,800

Withholding for state income taxes 7,200

Withholding for federal income taxes 16,000

State income taxes paid with last year’s tax return (paid when the return was filed in the current year)

500

Property taxes on home 1,100

Property taxes on automobile 300

Interest on home 9,700

Interest on credit cards 200

Cash contribution to church 3,900

In addition to the above, on September 17, Peter and Amy do‐ nate some Beta Trader, Inc. stock to Lakeville Community Col‐ lege. Beta Trader, Inc. is publicly traded. The FMV of the stock on the date of the contribution is $700. Peter and Amy had pur‐ chased the stock on November 7, 2003 for $300.

Compute Peter and Amy’s income tax liability for the current year using Form 1040, Schedules A and B, and Form 8283, if necessary. I:7-64 Kelly and Chanelle Chambers, ages 47 and 45, are mar‐ ried and live at 584 Thoreau Drive, Boston, MA 59483. Kelly’s Social Security number is 111-11-1111 and Chanelle’s is 222- 22-2222. The Chambers have two children: Emma, age 23, and Chet, age 19. Their Social Security numbers are 333-33-3333 and 444-44-4444, respectively. Emma is a single college student and earned $8,000 during the summer. Kelly and Chanelle help Emma through school by paying for her room, board, and tuition. Emma lives at home during the summer. Chet has a physical handicap and lives at home. He attends a local university and earned $4,000 working for a marketing firm. In sum, Kelly and Chanelle provide more than 50% of both Emma’s and Chet’s to‐ tal support for the year. Kelly is a commercial pilot for a small airline. His salary is $95,000, from which $19,000 of federal income tax and $8,000 of state income tax were withheld. Kelly also pays premiums for health, disability, and life insurance. $2,000 of the premium was for health insurance, $250 for disability, and $400 for life insur‐ ance. Chanelle owns Alliance Networks, a proprietorship that does net‐ work consulting. During the year, Chanelle’s gross revenues were $23,000. She incurred the following expenses in her business:

Liability insurance $ 700

Software rental 5,400

Journals and magazines 150

Training seminars 1,200

Supplies 1,300

Donations to a political campaign fund 800

Kelly enjoys playing guitar and plays in a band. Kelly’s band has developed a local following. This year, his gross revenues were $1,200 for playing shows and $700 on CD sales. He incurred the following expenses:

Studio rent expense $1,300

Sound system repairs 200

CD production 500

New guitar and amplifier 800

Kelly’s father passed away during the year. Kelly and Chanelle received $100,000 from the life insurance policy. Neither Kelly nor Chanelle paid any of the premiums. Chanelle purchased 100 shares of Thurston Co. stock on May 1, 1991, for $1,000. Thurston Co. was declared bankrupt during the current year.

Chet’s physician recommended that he see a physical therapist to help with his disability. Kelly paid the therapist $7,000 during the year because his insurance would not cover the bills. Kelly and Chanelle went to Las Vegas and won $5,000 at the blackjack table. The next night, they lost $6,000. Kelly and Chanelle gave $900 to their church and, during the year, they had the following other income and expenses:

Real estate taxes $1,400

Property taxes on car (determined by value) 500

Home mortgage interest 9,000

Credit card finance charges 2,600

Tax return preparation fees ($600 is allocable to Chanelle’s business)

1,000

Sales tax on purchases during the year 6,200

Interest from a savings account 800

Interest from City of Boston Bonds 700

Dividend from 3M stock 400

Prepare Kelly and Chanelle’s tax return Form 1040 and Sched‐ ules A, B, C, D, and SE for the current year.

Case Study Problems

I:7-65 Brian Brown, an executive at a manufacturing enterprise, comes to you on December 1 of the current year for tax advice. He has agreed to donate a small tract of land to the Rosepark Community College. The value of the land has been appraised at $58,000. Mr. Brown purchased the land 14 months ago for $50,000. Mr. Brown’s estimated AGI for the current year is $100,000. He plans to retire next year and anticipates that his AGI will fall to $35,000 for all subsequent years. He does not an‐ ticipate making any additional large charitable contributions. He understands that there are special rules dealing with charitable contributions and wants your advice in order to get the maxi‐ mum overall tax benefit from his contribution. Because the col‐ lege plans to use the property, selling the land is not an alterna‐ tive. You are to prepare a letter to Mr. Brown explaining the tax consequences of the different alternatives. His address is 100 East Rosebrook, Mesa, Arizona 85203. For purposes of your analysis, assume that Mr. Brown is married and files a joint re‐ turn. Also assume that Mr. Brown feels that an appropriate dis‐ count rate is 10%. In your analysis, use the tax rate schedules for the current year. I:7-66 For several years, you have prepared the tax return for Al‐ pha Corporation, a closely held corporation engaged in manu‐ facturing garden tools. On February 20 of the current year, Bill Johnson, the president of Alpha Corporation, delivered to your office the files and information necessary for you to prepare Al‐ pha’s tax return for the immediately preceding tax year. Included in this information were the minutes of all meetings held by Al‐ pha’s Board of Directors during the year in question.

Then on February 27, Bill stops by your office and hands you an “addendum” to the minutes of the director’s meeting held De‐ cember 15 of the tax year for which you are preparing the tax re‐ turn. The addendum is dated the same day as the director’s meeting, and authorizes a charitable contribution pledge of $20,000 to the local community college. With a wink and a big smile, Bill explains that the addendum had been misplaced. In reviewing the original minutes, you find no mention of a charita‐ ble contribution pledge. What should you do? [See Appendix E and the Statements on Standards for Tax Services section in Chapter I:15 (or C:1 of the Comprehensive volume) for a discussion of these issues.]

Tax Research Problems

I:7-67 Mark Hancock is a self-employed attorney who operates his law practice as an unincorporated sole proprietorship. In 2014, the IRS disallowed several business deductions he took in 2012 and 2013. In addition to paying the deficiency and as‐ sessed penalties, he also pays $18,000 in interest on the tax owed. Can he deduct that interest in the current year?

Sec. 162, Sec. 163 Reg. Sec. 1.163-9T Kikalos v. Comm., 84 AFTR 2d 99-5933

I:7-68 Last year, Mr. Smith was involved in an automobile acci‐ dent, severely injuring his legs. As part of a long-term rehabilita‐ tion process, his physician prescribes a daily routine of swim‐ ming. Because there is no readily available public facility nearby,

epub://bzuuotwrytev5hqueb07.vbk/OPS/xhtml/fileP700049741300000000000000000BC7A.xhtml#P700049741300000000000000000BC7A

epub://bzuuotwrytev5hqueb07.vbk/OPS/xhtml/fileP70004974130000000000000000082F1.xhtml#P70004974130000000000000000082F1

Smith investigates the possibility of either building a pool in his own back yard or purchasing another home with a pool. In the current year he finds a new home with a pool and purchases it for $175,000. He then obtains some estimates and finds that it would cost approximately $20,000 to replace the pool in the home he has just purchased. He also obtains some real estate appraisals, which indicate that the existing pool increases the value of the home by only $8,000. During the current year, Smith also expends $500 in maintaining the pool and $1,800 in other medical expenses. What is the total amount of medical expenses he may claim in the current year? Smith’s AGI for the year is $60,000.

Sec. 213 Reg. Sec. 1.213-1(e)(1)(iii) Richard A. Polacsek, 1981 PH T.C. Memo ¶81,569, 42 TCM 1289 Paul A. Lerew, 1982 PH T.C. Memo ¶82,483, 44 TCM 918 Jacob H. Robbins, 1982 PH T.C. Memo ¶82,565, 44 TCM 1254