4/19/2017 OneNote Online 11.3.14: Practice Problems Tuesday, December 23, 2014 7:12 PM1. Taxpayer received 10 shares of Widget, Inc. stock worth $100,000 as a bequest under her aunt’s will. In November of this tax year, she received a check for $2,500 from Widget as dividends on the stock she had inherited. Does Taxpayer have any tax coWe also discuss several other topics like describe how a clastic sedimentary rock formed from its unweathered parent rock
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nsequences? 1. Bequest excluded §102 2. Dividends included §61(a)(7) 2. In June of this tax year, Taxpayer found a buried treasure worth $300,000. Learning of his discovery, two friends filed suit claiming that they had an oral contract with him to split any treasure between them equally. The suit is still outstanding on December 31, of this tax year. Any tax consequences to Taxpayer in Year 1 with respect to the buried treasure? 3. In January of this tax year, Aunt purchased some shares of Widget, Inc. stock for $15,000. A month later, when Aunt died, the value of these shares had declined to $10,000, the value used in her estate tax calculations. As a result of a bequest in Aunt’s will, the shares were distributed to Taxpayer in April of this tax year. When Taxpayer received the shares as a distribution from Aunt’s estate in April Taxpayer had . . . 4. The price of the shares that Taxpayer inherited rebounded later in this tax year, and Taxpayer sold them in November of this tax year to Stranger for their fair market value of $16,000. The tax consequences to Taxpayer is that he . . . 5. As a 25th birthday present, in February of this tax year, Taxpayer received from her Aunt a piece of heirloom jewelry, a ring that had been passed down from generation to generation. Aunt had inherited the ring herself from her grandmother 20 years earlier (when its value was $40,000 and its basis in grandmother's hands had been $1,000). When Taxpayer received the ring, its value was $100,000. In November of this tax year, Taxpayer fell on financial hard times and being desperate for cash, sold the ring to Stranger for $90,000, although it was worth $105,000. From the sale of the ring Taxpayer will. . . 6. Stranger was transferred by his employer and needed to sell his home in a hurry. Taxpayer purchased the home from Stranger for only $400,000, which was $ 40,000 less than its fair market value of $440,000. What is Taxpayer’s basis in the home? 7. Mega Law Firm has had a policy of lending its new associates $50,000 to use as a down payment on a home. The firm has charged the prevailing rate of interest. Three years ago, Associate borrowed the money and purchased her first residence. She has paid all payments as they have come due and has lowered the amount of the loan to $45,000. In September of this year, after receiving a large contingency fee, as a bonus to Associate, Mega cancelled Associate's outstanding $45,000 loan obligation to the firm. In this tax year, the tax consequence of this event to Associate is that Associate has: 8. Taxpayer was injured in an accident while making a delivery for Employer and lost his big toe. Employer paid $2,500 this year in premiums to provide accident and health insurance for each employee, including Taxpayer. After Taxpayer filed a claim under this policy, the insurance company paid Taxpayer $8,000 for loss of his big toe and $5,000 for lost wages while he recuperated. 9. Last year, Taxpayer, a selfemployed consultant, was injured while driving to a client's factory. He incurred $40,000 in medical expenses, none of which he deducted under section 213 in calculating his federal income tax for last year. Fortunately, he had been paying for accident and health insurance, and this tax year, the insurance company sent him a check for $45,000, that covered his medical expenses and paid him $500 a day while he was in the hospital. 10. Taxpayer was injured while water skiing on vacation in June of this year. His sister, a doctor, treated him for no charge, but she gave him a "bill" for $1,000 that he could file with the Healthwell Insurance Company (HIC). In August of this tax year, he received a check from HIC for $800. His employer had paid HIC $900 in premiums for each of its employees, including Taxpayer, for this health insurance. https://onedrive.live.com/edit.aspx?resid=5F38432506E3EA06!2126&cid=5f38432506e3ea06&app=OneNote 1/3 4/19/2017 OneNote Online 11. Taxpayer, who is a doctor specializing in geriatrics, has an understanding with her clients that they can pay a portion of the usual bill for her services if they make Taxpayer the beneficiary of a bequest in their wills. During this tax year, Taxpayer received $50,000 under Peter Patient's will. Peter was a patient of Taxpayer's who paid only $40,000 (not the $90,000 that would normally have been billed). For this tax year, from receipt of the $50,000 distribution from Peter's estate, Taxpayer has: 12. A year ago, Taxpayer borrowed $25,000 from Stranger, to purchase some Flubber, Inc. stock for investment. In this tax year, Taxpayer repaid the debt with Stranger's consent by conveying to Stranger an unimproved plot of land worth $25,000. Taxpayer had purchased the land five years earlier for $18,000 and held it for investment. In this tax year, Taxpayer will 13. Taxpayer borrowed $125,000 from Bank, pledging the stock as security. In January 2011, Taxpayer repaid $ 5,000 of the loan. In September 2011, when the stock was worth $210,000, Taxpayer made a gift of the stock to Sister on condition that she repay the remaining $120,000 balance due on the loan. No gift tax was paid. What are the tax consequences to Taxpayer? What is Sister’s basis in the Widget stock? 14. Taxpayer, who has never married, purchased her first home and used it as her principal residence for a year before she relocated to a new city when she was accepted at law school. During the 3 years she attended law school, Taxpayer rented out her house to Stranger. She graduated and decided to spend a year traveling around the world "to find herself" before beginning work as a lawyer. Before leaving on her travels, Taxpayer sold her house, realizing a $40,000 gain. The amount Taxpayer must include in her gross income is . . . 15. Three years ago Mr. and Ms. Taxpayer married and purchased their first home in Capital City, holding title as joint tenants. Ms. Taxpayer, a local attorney, resided in the home all year. Mr. Taxpayer worked as a college professor in Metro in a neighboring state. He signed a yearly lease on an apartment in Metro, but he spent 3 weekends a month and 10 weeks of the school intersessions with Ms. Taxpayer in their Capital City home. This year they sold their home in Capital City, realizing a $550,000 gain. On their joint federal income tax return, the amount of the gain they must recognize is . . . 16. Taxpayer sued the Doctor for failure to diagnose and treat Taxpayer's medical condition that eventually adversely affected his health. In settlement of the suit, Taxpayer received a payment of $250,000 from the insurance company that represented Doctor, which the parties agreed to allocate as follows: $150,000 for pain and suffering; $60,000 for past and future medical expenses; and $40,000 for lost wages. The tax consequence to Taxpayer from receipt of this $250,000 payment is . . . 17. Client was injured in a car accident. As Attorney for Client, you have sued Driver. Driver's lawyer has proposed the 2 following arrangements as possible means to settle the lawsuit. Option A: Driver will pay Client a total of $100,000 that will be paid in 10 equal, annual payments of $10,000 each. Option B: Driver will pay Client a total of $75,000 in a lump sum payment this year. In discussing with your Client whether to accept Option A or Option B, you should advise Client that, as to the tax consequences that flow from these options there are . . . 18. Taxpayer resisted her Employer's sexual advances, which persisted over an 18month period. When Employer fired her, she filed suit for wrongful termination and emotional distress. Her claim included the medical bills she had already incurred for psychiatric counseling to address her emotional distress. The case settled, and Taxpayer received from Employer damages for her emotional distress (including the psychiatrist's bills) along with damages for wrongful termination. 19. On August 1 of this year, while walking in the mall, Taxpayer discovered an antique diamond medallion on the floor. A jeweler stated that it was difficult for him to appraise the medallion but that it was probably worth between $5,000 and $15,000. As required by state law, Taxpayer turned the medallion in to the police, but no one had claimed it during the time prescribed by law. On October 1 of this year, the police returned the medallion to Taxpayer. In January of next year he will sell the medallion for $20,000. Taxpayer will . . . 20. In Year One, for investment, Taxpayer, a good negotiator, purchased from Stranger for $100,000 cash a collection of 10 identical gold coins, reliably appraised at around $105,000. Then in Year Two, Taxpayer had the collection appraised by an expert at $120,000. The following year, Year Three,https://onedrive.live.com/edit.aspx?resid=5F38432506E3EA06!2126&cid=5f38432506e3ea06&app=OneNote 2/3 4/19/2017 OneNote Online Taxpayer used the collection as security for a $25,000 loan from Bank. He used the $25,000 to pay for some elective cosmetic surgery that was not covered by medical insurance. This year, Year 4, Taxpayer sells one of the coins for $13,000. The first year in which there is an event that triggers Taxpayer's recognition of any amount of gross income is: 21. Taxpayer, an employee of Widget, Inc., won the competition for turning in the best idea to improve company morale. At a large ceremony in September of this year, Taxpayer was awarded an allexpense paid trip to Las Vegas for two, and Taxpayer chose to take her husband with her. The trip's fair market value was $8,000 (or $4,000 for each person). The couple was unable to schedule the trip until February of next year, when they both had time off during the President's Day holidays. In April of next year, Taxpayer files a separate return from her husband for this year. Taxpayer has gross income of . . . 22. O owes B $10,000. Under an agreement, O paints B's house, a service worth $7,000. B cancels the debt. O has $7,000 of compensation gross income and $3,000 of discharge of indebtedness gross income. 23. B borrows money from C. Thereafter, it is alleged that C engaged in unfair lending practices. Under a settlement, a trust is established, funded by C, that will make payments to D, the creditor to whom C sold B's loan. Are the payments made to D included in B's gross income? 24. In January of last year Taxpayer purchased a wide screen television for $5,000 and used it solely for personal purposes. In December of this year, she sold it to Stranger for $1,000, its fair market value, so that she could buy the latest high definition television for $6,000. On the sale of the old wide screen television, Taxpayer realizes a $4,000 loss. What is the income tax consequence of this realized loss to Taxpayer? 25. On June 1 of the current year, Taxpayer purchased a truck to use in his business. Unfortunately, while driving the truck from the dealership to the office, a reckless driver forced Taxpayer off the road, totaling the truck. Taxpayer had paid $40,000 for the truck, although purchasers with less bargaining power would have paid $45,000. The business insurance policy covered this type of loss, and in August of this year Taxpayer received a check for $30,000. Is Taxpayer authorized to take a loss deduction because of these events? 26. Three years ago, Taxpayer purchased for $3,500 a computer to use in her office. This year, when the computer had a fair market value of $1,500 and an adjusted basis of $500 (after subtracting for depreciation under § 167), the computer was completely destroyed in a fire. Taxpayer did not have fire insurance. How much is Taxpayer allowed to deduct which of the following amounts as a loss deduction in the current year? 27. In the current year, Taxpayer was insolvent by $30,000 because immediately prior to the transaction described below, her liabilities totaled $100,000 and the fair market value of her assets was only $70,000. Taxpayer undertook a second job on nights and weekends, working for her uncle's repair service, and earned $35,000. What will be the impact on Taxpayer's gross income from these events? 28. Taxpayer borrowed $10,000 from Stranger. For the next two years Taxpayer paid an appropriate amount of interest and in addition paid off a total of $1,000 of the principal, leaving a loan balance of $9,000. This year Stranger needed cash and agreed to wipe out the remaining loan obligation of $9,000 for an immediate cash payment of $8,000. Taxpayer has discharge of indebtedness income of 29. Same facts as above, except that this year when Stranger and Taxpayer settled the loan, Taxpayer paid off the remaining balance owing on the loan of $9,000 by conveying to Stranger some shares of Widget, Inc. stock valued at $8,000, that he had purchased 10 years earlier for $3,000. Does this change in facts change the income tax consequences for Taxpayer? 30. Taxpayer borrowed $100,000 on a personal unsecured note from Bank. Taxpayer suffered some financial reversals and realized that she had debts totaling $300,000 but that the fair market value of her assets was only $280,000. She contacted Bank. Bank wanted to keep Taxpayer as a customer so Bank agreed to settle the remaining balance on the loan of $90,000 for a payment of $65,000. The amount Taxpayer must include in gross income ishttps://onedrive.live.com/edit.aspx?resid=5F38432506E3EA06!2126&cid=5f38432506e3ea06&app=OneNote 3/3 4/19/2017 OneNote Online 11.11.14: Assignment Tuesday, December 23, 2014 7:12 PMTopic: BusinessRelated Deductions. Study: §§ 162(a); 195 and 212. What are the conditions that a taxpayer must meet in order to claim a business expense deduction under § 162? Jenkins v. Commissioner, T.C. Memo. 1983667. Other than singing professionally, what other kind of activity was the taxpayer engaged in? In your opinion were the taxpayer’s incurred expenses in connection with that activity? Pevsner v. Commissioner, 628 F.2d 467 Higgins v. Commissioner, 312 U.S. 212 What type of activity was the taxpayer engaged in? What expenses did the taxpayer incur in his activity? Were they expenses incurred while carrying on a trade or business (according to the Court)? What are your thoughts concerning the outcome of the case? How did Congress respond to the harshness of Higgins? Problems: 1. Finn is a selfemployed certified financial planner in Palm Desert, California. Determine which, if any of the following costs incurred by Finn during the year are deductible: a. Finn advised a client to invest $50,000 in a company that was manufacturing a lowcost but hightech mousetrap. Finn’s enthusiasm for the company’s product was not shared by the public generally and the stock became worthless. Wishing to avoid hard feelings, Finn paid $25,000 to the client. b. Finn paid $25,000 per year to an agency that provides chauffeur service. Under his contract with the agency, Finn is entitled to up to 8 hours of chauffeur service per week. Finn usually takes advantage of this service a couple of times each business day when he makes house calls to some of his wealthy clients. Finn tells you: “The chauffeur service enables me to forget the problems of the world while I ride in luxury. My clients are impressed when they see me arrive in a chauffeured limousine. They assume that I must know what I’m doing. 2. Mark is a 35 yearold local newscaster. His television work requires “appropriate” dress, and accordingly, he maintains, as his employer expects, an extensive wardrobe of expensive suits, shirts, and ties which he uses for his twicenightly newscasts. In offduty hours, Mark never wars the clothes worn at work, but like his friends, prefers to wear very casual attire. Is Mark entitled to deduct the cost of his business attire? No because he can wear them other places if he chooses to do so. Also because it's a suit and suits can be worn to other functions besides work. 3. Phil, bored with his lucrative tax practice, decides to enter the fatfood business. He buys the Burt’s Burgers franchise for his area for $500,000. Rather than purchasing a building for the business, Phil decides to rent commercial space and spends $5,000 in advertising for such space. After finally renting a welllocated commercial building, Phil spent two months remodeling the building. During this period prior to opening, Phil also paid $5,000 in building rent, $3000 for employee training sessions at the headquarters of Burt’s Burgers, and $6,000 in wages to the employees who were being trained. May Phil deduct these expenses? Yes, §162(a)(3) https://onedrive.live.com/edit.aspx?resid=5F38432506E3EA06!2126&cid=5f38432506e3ea06&app=OneNote 1/1