South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by Hoffman Smith Solutions Manual Test Bank

South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by Hoffman Smith Solutions Manual Test Bank -- price  $35

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Contents of Appendix E
Problem 1 – Karl F. and Jeanne S. Wheat – Individual Income Tax Return
Problem 2 – Robert (Bob) S. and Sally D. Grove – Individual Income Tax Return
Problem 3 – Pet Kingdom – Form 1120 Corporate Tax Return
Problem 4 – By the Numbers – Form 1120 Corporate Tax Return
Problem 5 – Rock the Ages – Form 1065 tax return
Problem 6 – Chocolat, Inc – Form 1120S
Problem 7 – Daniel and Lisa Ward – Form 709 Tax Returns
Problem 8 – Pam Butler – Form 706 Tax Return
Problem 9 – Green – Form 1041 Tax Return


1. LO.1, 2 Erin, who prepared her own income tax return for the current year, failed to claim a deduction for her contribution to a traditional Individual Retirement Account (IRA). Her AGI, as reported on the incorrect return, was $100,000, and her medical expenses were $10,000. a. Will the correction of this omission affect the amount of medical expenses Erin can deduct? Explain. b. Will Erin’s medical expense deduction increase or decrease when she corrects her return?

2. LO.2 Ruth incurred the following expenditures during the year:

• Medical insurance premiums.

• Long-term care insurance premiums.

• Life insurance premiums.

• Nonprescription supplements to curb panic attacks.

• Fees for an alcohol rehabilitation program.

• Contact lenses.

• Travel expenses to obtain treatment at the MD Anderson Cancer Center in Houston. Which of these expenses can Ruth include as medical expenses for purposes of computing her medical expense deduction?

3. LO.2 Joe was in an accident and required cosmetic surgery for injuries to his nose. He also had the doctor do additional surgery to reshape his chin, which had not been injured. Will the cosmetic surgery to Joe’s nose qualify as a medical expense? Will the cosmetic surgery to Joe’s chin qualify as a medical expense? Explain. 10-36 PART 3 Deductions    

4. LO.2, 8 Frank, a widower, had a serious stroke and is no longer capable of caring for himself. He has three sons, all of whom live in different states. Because they are unable to care for Frank in their homes, his sons have placed him in a nursing home equipped to provide medical and nursing care. Total nursing home expenses amount to $36,000 per year. Of this amount, $15,000 is directly attributable to medical and nursing care. Frank’s Social Security benefits are used to pay $10,000 of the nursing home charges. He has no other income. His sons plan to split the remaining medical expenses equally. a. What portion of the nursing home charges is potentially deductible as a medical expense? b. Can you provide Frank’s sons with a tax planning idea for maximizing the deduction for his medical expenses?

5. LO.2 During the current year, Pauline and her three dependent children had annual physical exams, which cost $750, and dental checkups for all four of them, which cost $420. In addition, Pauline paid $800 for medically supervised treatments to enable her to stop smoking. After she stopped smoking, she began to gain weight and incurred $1,200 in costs for a medically supervised weight loss program. Which of these expenses qualify for the medical expense deduction?

6. LO.2 Caroyl incurred $8,700 of medical expenses in November 2012. On December 5, the clinic where she was treated mailed her the insurance claim form it had prepared for her with a suggestion that she sign and return the form immediately to receive her reimbursement from the insurance company by December 31. What tax issues should Caroyl consider in deciding whether to sign and return the form in December 2012 or January 2013?

7. LO.2 David, a sole proprietor of a bookstore, pays a $7,500 premium for medical insurance for him and his family. Joan, an employee of a small firm that doesn’t provide her with medical insurance, pays medical insurance premiums of $8,000 for herself. How does the tax treatment differ for David and Joan?

8. LO.2 Arturo, a calendar year taxpayer, paid $16,000 in medical expenses and sustained a $20,000 casualty loss in 2012. He expects $12,000 of the medical expenses and $14,000 of the casualty loss to be reimbursed by insurance companies in 2013. Before considering any limitations on these deductions, how much can Arturo include in determining his itemized deductions for 2012?

9. LO.2 Hubert, a self-employed taxpayer, is married and has two children. He has asked you to explain the tax and nontax advantages of creating a Health Savings Account (HSA) for him and his family.

10. LO.2 A local ophthalmologist’s advertising campaign included a certificate for free LASIK eye surgery for the lucky winner of a drawing. Ahmad held the winning ticket, which was drawn in December 2011. Ahmad had no vision problems and was uncertain what he should do with the prize. In February 2012, Ahmad’s daughter, who lives with his former wife, was diagnosed with a vision problem that could be treated with either prescription glasses or LASIK surgery. The divorce decree requires that Ahmad pay for all medical expenses incurred for his daughter. Identify the relevant tax issues for Ahmad.

11. LO.3 Diego sold his personal residence to Dinah on July 1, 2012. He had paid real property taxes on March 1, 2012, the due date for property taxes for 2012. a. How will Diego’s payment affect his deduction for property taxes in 2012? b. Will Diego’s payment of the taxes have any effect on Dinah’s itemized deductions for 2012? Explain. c. What other tax or financial effects will Diego’s payment of the taxes have on either party?

12. LO.5, 8 Julia owns a principal residence in California, a condo in New York City, and a houseboat in Florida. All of the properties have mortgages on which Julia pays interest. What are the limitations on Julia’s mortgage interest deduction? What strategy should Julia consider to maximize her mortgage interest deduction?

13. LO.5, 8 Mason Gregg’s car was destroyed by a flood. Unfortunately, his insurance had lapsed two days before he incurred the loss. Mason uses his car for both business and personal use. Mason, who is self-employed, does not have adequate savings to replace the car and must borrow money to purchase a new car. He is considering taking out a home equity loan, at a 5% interest rate, to obtain funds for the purchase. Margaret, his wife, would prefer not to do so because they paid off their mortgage recently and she does not want to incur any obligations related to their home. She would prefer to sell some of their stock in Bluebird, Inc., to raise funds to purchase the new car. Mason does not want to sell the stock because it has declined in value since they purchased it and he is convinced that its price will increase in the next two years. Mason has suggested that they obtain conventional financing for the purchase from their bank, which charges 7% interest on car loans. Identify the tax issues related to each of the three alternatives Mason and Margaret are considering.

14. LO.5 Commercial Bank has initiated an advertising campaign that encourages customers to take out home equity loans to pay for purchases of automobiles. Are there any tax advantages related to this type of borrowing? Explain.

15. LO.5 Thomas purchased a personal residence from Rachel. To sell the residence, Rachel agreed to pay $5,500 in points related to Thomas’s mortgage. Discuss the deductibility of the points.

16. LO.5 Ellen borrowed $50,000 from her parents for a down payment on the purchase of a new home. She paid interest of $3,200 in 2010, $0 in 2011, and $9,000 in 2012. The IRS disallowed the deduction. What explanation can you offer for the disallowance?

17. LO.6 The city of Lawrence was hit by a tornado in April 2012, leaving many families in need of food, clothing, shelter, and other necessities. Betty contributed $500 to a family whose home was completely destroyed by the tornado. Jack contributed $700 to the family’s church, which gave the money to the family. Discuss the deductibility of these contributions.

18. LO.6 Paula contributed Orange Corporation common stock to the United Way, a qualified charitable organization. In addition, she contributed tables and chairs from her proprietorship’s inventory to the high school in her city. Should Paula’s charitable contribution deduction for these contributions be determined by the basis or fair market value of the contributed items?

19. LO.6 Nancy, who is a professor at State University, does some of her writing and class preparation at home at night. Her department provides faculty members with a $1,500 allowance for a desktop computer for use at school, but does not ordinarily provide computers for use at home. To have a computer for use at school and at home, Nancy has asked the department to provide her with a notebook computer that costs $2,500. The head of her department is willing to provide the standard $1,500 allowance and will permit Nancy to purchase the $2,500 notebook computer if she makes a donation of $1,000 to the department. If she acquires the notebook computer, Nancy’s home use of the computer will be approximately 60% for business and 40% for personal use not related to her job. Discuss the tax issues that Nancy should consider in deciding whether to acquire the notebook computer under these conditions.

20. LO.6 Fran traveled to San Francisco during the year to do volunteer work for one week for the Salvation Army. She normally receives $1,500 salary per week at her job and is planning to deduct the $1,500 as a charitable contribution. In addition, Fran incurred the following costs in connection with the trip: $400 for transportation, $1,600 for lodging, and $550 for meals. What is Fran’s deduction associated with this charitable activity?

21. LO.6, 8 William, a high school teacher, earns about $50,000 each year. In December 2012, he won $1 million in the state lottery. William plans to donate $100,000 to his church. He has asked you, his tax adviser, whether he should donate the $100,000 in 2012 or 2013. Identify the tax issues related to William’s decision.

22. LO.6, 8 Nate, whose combined Federal and state income tax rates total 40% in 2012, expects to retire in 2013 and have a combined tax rate of 30%. He plans to donate $100,000 to his church. Because he will not have the cash available until 2013, Nate donates land (long-term capital gain property) with a basis of $20,000 and fair market value of $100,000 to the church in December 2012. He reacquires the land from the church for $100,000 in February 2013. Discuss Nate’s tax objectives and all tax issues related to his actions.

23. LO.6, 8 Megan decided to have a garage sale to get rid of a number of items she no longer needed, including books, old computer equipment, clothing, bicycles, and furniture. She scheduled the sale for Friday and Saturday, but was forced to close at noon on Friday because of a torrential downpour. She had collected $500 for the items she sold before closing. The heavy rains continued through the weekend, and Megan was unable to continue the sale. She had not enjoyed dealing with the people who came to the sale on Friday morning, so she donated the remaining items to several local organizations. Megan has asked your advice on how she should treat these events on her tax return. List some of the tax issues you would discuss with her. P R O B L E M S

24. LO.2 Hunter and Cynthia are married and together have AGI of $100,000 in 2012. They have three dependents and file a joint return. They pay $3,000 for a high-deductible health insurance policy and contribute $2,400 to a qualified Health Savings Account. During the year, they paid the following amounts for medical care: $6,900 in physician and dentist bills and hospital expenses and $2,300 for prescribed medicine and drugs. In November 2012, they received an insurance reimbursement of $2,500 for the physician and hospital expenses. They expect to receive an additional reimbursement of $1,500 in January 2013. Determine the maximum deduction allowable for medical expenses in 2012.

25. LO.2 Andy had AGI of $80,000 for 2012. He was injured in a rock-climbing accident and paid $5,200 for hospital expenses and $2,800 for doctor bills. Andy also incurred medical expenses of $2,400 for his child, Jodi, who lives with his former wife, Pearl, and is claimed as a dependent by her. In 2013, Andy was reimbursed $2,600 by his insurance company for the medical expenses attributable to the rock-climbing accident. a. Compute Andy’s deduction for medical expenses in 2012. b. Assume that Andy would have elected to itemize his deductions even if he had no medical expenses in 2012. How much, if any, of the $2,600 reimbursement must be included in gross income in 2013? c. Assume that Andy’s other itemized deductions in 2012 were $5,300 and that he filed as a head of household. How much of the $2,600 reimbursement must he include in gross income in 2013?

26. LO.2 Pablo suffers from emphysema and severe allergies and, upon the recommendation of his physician, has a dust elimination system installed in his personal residence. In connection with the system, Pablo incurs and pays the following amounts during 2012: Doctor and hospital bills $1,600 Dust elimination system 8,800 Increase in utility bills due to the system 350 Cost of certified appraisal 220 In addition, Pablo pays $750 for prescribed medicines. The system has an estimated useful life of 15 years. The appraisal was to determine the value of Pablo’s residence with and without the system. The appraisal states that his residence was worth $325,000 before the system was installed and $327,500 after the installation. Pablo’s AGI for the year was $50,000. How much of the medical expenses qualifiy for the medical expense deduction in 2012?

27. LO.2 For calendar year 2012, Jean was a self-employed consultant with no employees. She had $80,000 of net profit from consulting and paid $7,000 in medical insurance premiums on a policy covering 2012. How much of these premiums may Jean deduct as a deduction for AGI? How much may she deduct as an itemized deduction (subject to the 7.5% floor)?


28. LO.2 During the current year, Susan incurred and paid the following expenses for Beth (her daughter), Ed (her father), and herself: Surgery for Beth $4,500 Red River Academy charges for Beth: Tuition 5,100 Room, board, and other expenses 4,800 Psychiatric treatment 5,100 Doctor bills for Ed 2,200 Prescription drugs for Susan, Beth, and Ed 780 Insulin for Ed 540 Nonprescription drugs for Susan, Beth, and Ed 570 Charges at Heartland Nursing Home for Ed: Medical care 5,000 Lodging 2,700 Meals 2,650

Beth qualifies as Susan’s dependent, and Ed would also qualify except that he receives $7,400 of taxable retirement benefits from his former employer. Beth’s psychiatrist recommended Red River Academy because of its small classes and specialized psychiatric treatment program that is needed to treat Beth’s illness. Ed, who is a paraplegic and diabetic, entered Heartland in October. Heartland offers the type of care that he requires.

Upon the recommendation of a physician, Susan has an air filtration system installed in her personal residence. She suffers from severe allergies. In connection with this equipment, Susan incurs and pays the following amounts during the year: Filtration system and cost of installation $6,500 Increase in utility bills due to the system 700 Cost of certified appraisal 360

The system has an estimated useful life of 10 years. The appraisal was to determine the value of Susan’s residence with and without the system. The appraisal states that the system increased the value of Susan’s residence by $2,200. Ignoring the 7.5% floor, what is the total of Susan’s expenses that qualifies for the medical expense deduction?

29. LO.2 In May, Rebecca’s daughter, Susan, sustained a serious injury that made it impossible for her to continue living alone. Susan, who is a novelist, moved back into Rebecca’s home after the accident. Susan has begun writing a new novel based on her recent experiences. To accommodate Susan, Rebecca incurred significant remodeling expenses (widening hallways, building a separate bedroom and bathroom, and making kitchen appliances accessible to Susan). In addition, Rebecca had an indoor swimming pool constructed so that Susan could do rehabilitation exercises prescribed by her physician. In September, Susan underwent major reconstructive surgery in Denver. The surgery was performed by Dr. Rama Patel, who specializes in treating injuries of the type sustained by Susan. Rebecca drove Susan from Champaign, Illinois, to Denver, a total of 1,100 miles, in Susan’s specially equipped van. They left Champaign on Tuesday morning and arrived in Denver on Thursday afternoon. Rebecca incurred expenses for gasoline, highway tolls, meals, and lodging while traveling to Denver. Rebecca stayed in a motel near the clinic for eight days while Susan was hospitalized. Identify the relevant tax issues based on this information and prepare a list of questions you would need to ask Rebecca and Susan to advise them as to the resolution of any issues you have identified.

30. LO.2 In 2012, Roger pays a $3,000 premium for high-deductible medical insurance for him and his family. In addition, he contributed $2,600 to a Health Savings Account. a. How much may Roger deduct if he is self-employed? Is the deduction for AGI or from AGI? b. How much may Roger deduct if he is an employee? Is the deduction for AGI or from AGI?

31. LO.3 In 2005, Angela purchased a personal residence from Victor. She paid $300,000 for the residence. Victor paid real estate taxes of $9,125 for the real estate property tax year, of which $5,500 was allocable to the portion of the year that Angela owned the residence. Angela sold the residence to Earl for $350,000 on December 7, 2012. Earl paid

real estate taxes of $10,220 for the real estate property tax year, of which $9,576 was allocable to the portion of the year that Angela owned the residence. Angela provided you with the above information and asked that you determine her basis in the residence at the date of sale, the amount realized for the residence, her realized gain on the sale, and her property tax deduction for 2012. Write a letter to Angela Henson, who lives at 17250 Calistoga Drive, El Dorado, KS 67042, to communicate your answers.

32. LO.4 Norma, who uses the cash method of accounting, lives in a state that imposes an income tax. In April 2012, she files her state income tax return for 2011 and pays an additional $1,000 in state income taxes. During 2012, her withholdings for state income tax purposes amount to $7,400, and she pays estimated state income tax of $700. In April 2013, she files her state income tax return for 2012, claiming a refund of $1,800. Norma receives the refund in August 2013. a. Assuming that Norma itemized deductions in 2012, how much may she claim as a deduction for state income taxes on her Federal return for calendar year 2012 (filed April 2013)? b. Assuming that Norma itemized deductions in 2012, how will the refund of $1,800 that she received in 2013 be treated for Federal income tax purposes? c. Assume that Norma itemized deductions in 2012 and that she elects to have the $1,800 refund applied toward her 2013 state income tax liability. How will the $1,800 be treated for Federal income tax purposes? d. Assuming that Norma did not itemize deductions in 2012, how will the refund of $1,800 received in 2013 be treated for Federal income tax purposes?

33. LO.5 In 2003, Roland, who is single, purchased a personal residence for $340,000 and took out a mortgage of $200,000 on the property. In May of the current year, when the residence had a fair market value of $440,000 and Roland owed $140,000 on the mortgage, he took out a home equity loan for $220,000. He used the funds to purchase a recreational vehicle, which he uses 100% for personal use. What is the maximum amount on which Roland can deduct home equity interest?

34. LO.5 Malcolm owns 60% and Buddy owns 40% of Magpie Corporation. On July 1, 2012, each lends the corporation $30,000 at an annual interest rate of 10%. Malcolm and Buddy are not related. Both shareholders are on the cash method of accounting, and Magpie Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2013, Magpie repays the loans of $60,000 together with the specified interest of $6,000. a. How much of the interest can Magpie Corporation deduct in 2012? In 2013? b. When is the interest included in Malcolm and Buddy’s gross income?

35. LO.6 Nadia donates $4,000 to Eastern University’s athletic department. The payment guarantees that Nadia will have preferred seating near the 50-yard line. a. Assume that Nadia subsequently buys four $100 game tickets. How much can she deduct as a charitable contribution to the university’s athletic department? b. Assume that Nadia’s $4,000 donation includes four $100 tickets. How much can she deduct as a charitable contribution to the university’s athletic department? 36. LO.6 Rachel had AGI of $100,000 in 2012. She donated Bronze Corporation stock with a basis of $9,000 to a qualified charitable organization on July 5, 2012. a. What is the amount of Rachel’s deduction assuming that she purchased the stock on December 2, 2011, and the stock had a fair market value of $16,000 when she made the donation? b. Assume the same facts as in (a), except that Rachel purchased the stock on July 1, 2009. c. Assume the same facts as in (a), except that the stock had a fair market value of $5,000 (rather than $16,000) when Rachel donated it to the charity.

37. LO.6, 8 Pedro contributes a painting to an art museum in October of this year. He has owned the painting for 12 years, and it is worth $130,000 at the time of the donation. Pedro’s adjusted basis for the painting is $90,000, and his AGI for the year is $250,000. Pedro has asked you whether he should make the reduced deduction election for this

  contribution. Write a letter to Pedro Valdez at 1289 Greenway Avenue, Foster City, CA 94404 and advise him on this matter.

38. LO.6 During the year, Ricardo made the following contributions to a qualified public charity: Cash $220,000 Stock in Seagull, Inc. (a publicly traded corporation) 280,000 Ricardo acquired the stock in Seagull, Inc., as an investment five years ago at a cost of $120,000. Ricardo’s AGI is $840,000. a. What is Ricardo’s charitable contribution deduction? b. How are excess amounts, if any, treated?

39. LO.6 Ramon had AGI of $180,000 in 2012. He contributed stock in Charlton, Inc. (a publicly traded corporation), to the American Heart Association, a qualified charitable organization. The stock was worth $105,000 on the date it was contributed. Ramon had acquired it as an investment two years ago at a cost of $84,000. a. Assuming that Ramon carries over any disallowed contribution from 2012 to future years, what is the total amount he can deduct as a charitable contribution? b. What is the maximum amount Ramon can deduct as a charitable contribution in 2012? c. What factors should Ramon consider in deciding how to treat the contribution for Federal income tax purposes? d. Assume that Ramon dies in December 2012. What advice would you give the executor of his estate with regard to possible elections that can be made relative to the contribution?

40. LO.6 On December 28, 2012, Roberta purchased four tickets to a charity ball sponsored by the city of San Diego for the benefit of underprivileged children. Each ticket cost $200 and had a fair market value of $35. On the same day as the purchase, Roberta gave the tickets to the minister of her church for personal use by his family. At the time of the gift of the tickets, Roberta pledged $4,000 to the building fund of her church. The pledge was satisfied by a check dated December 31, 2012, but not mailed until January 3, 2013. a. Presuming that Roberta is a cash basis and calendar year taxpayer, how much can she deduct as a charitable contribution for 2012? b. Would the amount of the deduction be any different if Roberta was an accrual basis taxpayer? Explain.

41. LO.6, 8 In December each year, Eleanor Young contributes 10% of her gross income to the United Way (a 50% organization). Eleanor, who is in the 28% marginal tax bracket, is considering the following alternatives for satisfying the contribution. Fair Market Value (1) Cash donation $23,000 (2) Unimproved land held for six years ($3,000 basis) 23,000 (3) Blue Corporation stock held for eight months ($3,000 basis) 23,000 (4) Gold Corporation stock held for two years ($28,000 basis) 23,000 Eleanor has asked you to help her decide which of the potential contributions listed above will be most advantageous taxwise. Evaluate the four alternatives and write a letter to Eleanor to communicate your advice to her. Her address is 2622 Bayshore Drive, Berkeley, CA 94709.

42. LO.2, 3, 4, 5, 7, 8 Bart and Susan Forrest, both age 47, are married and have no dependents. They have asked you to advise them whether they should file jointly or separately in 2012. They present you with the following information:

Bart Susan Joint Salary $38,000 Business net income $110,000 Interest income 400 1,200 $2,200 Deductions for AGI 2,400 14,000 Medical expenses 9,500 900 State income tax 800 1,800 Real estate tax 3,800 Mortgage interest 4,200 Unreimbursed employee expenses 1,200 If they file separately, Bart and Susan will split the real estate tax and mortgage interest deductions equally. Write Bart and Susan a letter in which you make and explain a recommendation on filing status for 2012. Bart and Susan reside at 2003 Highland Drive, Durham, NC 27707.

43. LO.2, 3, 4, 5, 6, 7 Linda, who is a head of household with one dependent, had AGI of $150,000 for 2012. She incurred the following expenses and losses during the year: Medical expenses before the 7.5%-of-AGI limitation $20,000 State and local income taxes 4,500 State sales tax 1,300 Real estate taxes 4,000 Home mortgage interest 4,500 Credit card interest 1,000 Charitable contributions 5,000 Casualty loss before 10% limitation (after $100 floor) 20,000 Unreimbursed employee expenses subject to the 2%-of- AGI limitation 5,000 Calculate Linda’s allowable itemized deductions for the year.

44. LO.2, 3, 4, 5, 6, 7 For calendar year 2012, Stuart and Pamela Gibson file a joint return reflecting AGI of $264,000. Their itemized deductions are as follows: Medical expenses $25,300 Casualty loss after $100 floor (not covered by insurance) 28,600 Home mortgage interest 11,000 Credit card interest 800 Property taxes on home 14,300 Charitable contributions 18,700 State income tax 16,500 Tax return preparation fees 1,200 Calculate the amount of itemized deductions the Gibsons may claim for the year. C U M U L A T I V E P R O B L E M S

45. Alice J. and Bruce M. Byrd are married taxpayers who file a joint return. Their Social Security numbers are 123–45–6789 and 111–11–1111, respectively. Alice’s birthday is September 21, 1964, and Bruce’s is June 27, 1963. They live at 473 Revere Avenue, Lowell, MA 01850. Alice is the office manager for Lowell Dental Clinic, 433 Broad Street, Lowell, MA 01850 (employer identification number 98–7654321). Bruce is the manager of a Super Burgers fast-food outlet owned and operated by Plymouth Corporation, 1247 Central Avenue, Hauppauge, NY 11788 (employer identification number 11–1111111). The following information is shown on their Wage and Tax Statements (Form W–2) for 2011.

  Line Description Alice Bruce

1 Wages, tips, other compensation $52,600 $61,500

2 Federal income tax withheld 4,180 5,990

3 Social Security wages 52,600 61,500

4 Social Security tax withheld 2,209 2,583

5 Medicare wages and tips 52,600 61,500

6 Medicare tax withheld 763 892

15 State Massachusetts Massachusetts

16 State wages, tips, etc. 52,600 61,500

17 State income tax withheld 2,280 2,990

The Byrds provide over half of the support of their two children, Cynthia (born January 25, 1987, Social Security number 123–45–6788) and John (born February 7, 1991, Social Security number 123–45–6786). Both children are full-time students and live with the Byrds except when they are away at college. Cynthia earned $3,700 from a summer internship in 2011, and John earned $3,400 from a part-time job.

During 2011, the Byrds furnished 60% of the total support of Bruce’s widower father, Sam Byrd (born March 6, 1935, Social Security number 123–45–6787). Sam lived alone and covered the rest of his support with his Social Security benefits. Sam died in November, and Bruce, the beneficiary of a policy on Sam’s life, received life insurance proceeds of $600,000 on December 28.

The Byrds had the following expenses relating to their personal residence during 2011:

Property taxes $4,720

Qualified interest on home mortgage 9,130

Repairs to roof 4,780

Utilities 3,810

Fire and theft insurance 2,290

The following facts relate to medical expenses for 2011:

Medical insurance premiums $4,380

Doctor bill for Sam incurred in 2010 and not paid until 2011 7,760

Operation for Sam 7,310

Prescription medicines for Sam 860

Hospital expenses for Sam 2,850

Reimbursement from insurance company, received in 2011 3,000

The medical expenses for Sam represent most of the 60% that Bruce contributed toward his father’s support.

Other relevant information follows:

• When they filed their 2010 state return in 2011, the Byrds paid additional state income tax of $950.

• During 2011, Alice and Bruce attended a dinner dance sponsored by the Lowell Police Disability Association (a qualified charitable organization). The Byrds paid $400 for the tickets. The cost of comparable entertainment would normally be $160.

• The Byrds contributed $4,800 to Lowell Presbyterian Church and gave used clothing (cost of $1,100 and fair market value of $450) to the Salvation Army. All donations are supported by receipts and are in very good condition.

• In 2011, the Byrds received interest income of $2,695, which was reported on a Form 1099–INT from Second National Bank.

• Alice’s employer requires that all employees wear uniforms to work. During 2011, Alice spent $482 on new uniforms and $211 on laundry charges.

• Bruce paid $320 for an annual subscription to the Journal of Franchise Management.

• Neither Alice’s nor Bruce’s employer reimburses for employee expenses.

• The Byrds do not keep the receipts for the sales taxes they paid and had no major purchases subject to sales tax.

• Alice and Bruce paid no estimated Federal income tax. Neither Alice nor Bruce wants to designate $3 to the Presidential Election Campaign Fund. 10-44 PART 3 Deductions    

Part 1—Tax Computation

Compute net tax payable or refund due for Alice and Bruce Byrd for 2011. If they have overpaid, they want the amount to be refunded to them. If you use tax forms for your computations, you will need Forms 1040 and 2106 and Schedules A and B. Suggested software: H&R BLOCK At Home.

Part 2—Tax Planning

Alice and Bruce are planning some significant changes for 2012. They have provided you with the following information and asked you to project their taxable income and tax liability for 2012.

The Byrds will invest the $600,000 of life insurance proceeds in short-term certificates of deposit (CDs) and use the interest for living expenses during 2012. They expect to earn total interest of $21,000 on the CDs. Bruce has been promoted to regional manager, and his salary for 2012 will be $85,000. He estimates that state income tax withheld will increase by $4,000 and the Social Security tax withheld will be $3,570. Alice, who has been diagnosed with a serious illness, will take a leave of absence from work during 2012. The estimated cost for her medical treatment is $14,500, of which $5,500 will be reimbursed by their insurance company in 2012. John will graduate from college in December 2011 and will take a job in New York City in January 2012. His starting salary will be $37,500. Assume that all of the information reported in 2011 will be the same in 2012 unless other information has been presented above.

46. Paul and Donna Decker are married taxpayers, ages 44 and 42, who file a joint return for 2012. The Deckers live at 1121 College Avenue, Carmel, IN 46032. Paul is an assistant manager at Carmel Motor Inn, and Donna is a teacher at Carmel Elementary School. They present you with W–2 forms that reflect the following information: Paul Donna

Salary $58,000 $56,000

Federal tax withheld 6,770 6,630

State income tax withheld 900 800

FICA (Social Security and

Medicare) withheld 3,277 3,164

Social Security numbers 111–11–1111 123–45–6789

Donna is the custodial parent of two children from a previous marriage who reside with the Deckers through the school year. The children, Larry and Jane Parker, reside with their father, Bob, during the summer. Relevant information for the children follows:

Larry Jane

Age 17 18

Social Security numbers 123–45–6788 123–45–6787

Months spent with Deckers 9 9

Under the divorce decree, Bob pays child support of $150 per month per child during the nine months the children live with the Deckers. Bob says that he spends $200 per month per child during the three summer months they reside with him. Donna and Paul can document that they provide $2,000 support per child per year. The divorce decree is silent as to which parent can claim the exemptions for the children. In August, Paul and Donna added a suite to their home to provide more comfortable accommodations for Hannah Snyder (123–45–6786), Donna’s mother, who had moved in with them in February 2011 after the death of Donna’s father. Not wanting to borrow money for this addition, Paul sold 300 shares of Acme Corporation stock for $50 per share on May 3, 2012, and used the proceeds of $15,000 to cover construction costs. The Deckers had purchased the stock on April 29, 2007, for $25 per share. They received dividends of $750 on the jointly owned stock a month before the sale.

Hannah, who is 66 years old, received $7,500 in Social Security benefits during the year, of which she gave the Deckers $2,000 to use toward household expenses and deposited the remainder in her personal savings account. The Deckers determine that they have spent $2,500 of their own money for food, clothing, medical expenses, and other items for Hannah. They do not know what the rental value of Hannah’s suite would be, but they estimate it would be at least $300 per month.

Interest paid during the year included the following: Home mortgage interest (paid to Carmel Federal Savings & Loan) $7,890 Interest on an automobile loan (paid to Carmel National Bank) 1,660 Interest on Citibank Visa card 620

In July, Paul hit a submerged rock while boating. Fortunately, he was uninjured after being thrown from the boat and landing in deep water. However, the boat, which was uninsured, was destroyed. Paul had paid $25,000 for the boat in June 2011, and its value was appraised at $18,000 on the date of the accident.

The Deckers paid doctor and hospital bills of $8,700 and were reimbursed $2,000 by their insurance company. They spent $640 for prescription drugs and medicines and $2,810 for premiums on their health insurance policy. They have filed additional claims of $1,200 with their insurance company and have been told they will receive payment for that amount in January 2013. Included in the amounts paid for doctor and hospital bills were payments of $380 for Hannah and $850 for the children.

Additional information of potential tax consequence follows:

Real estate taxes paid $3,850

Sales taxes paid (per table) 1,379

Contributions to church 1,950

Appraised value of books donated to public library 740

Paul’s unreimbursed employee expenses to attend hotel management convention:

Airfare 340

Hotel 170

Meals 95

Registration fee 340

Refund of state income tax for 2011 (the Deckers itemized on their 2011 Federal tax return) 1,520

Compute net tax payable or refund due for the Deckers for 2012. Ignore the child tax credit in your computations. If the Deckers have overpaid, the amount is to be credited toward their taxes for 2013. R E S E A RCH P R OBLEMS

Research Problem 1. After several years of a difficult marriage, Donald and Marla agreed to a divorce. As part of the property settlement, Marla transferred to Donald corporate stock, a commercial building, and a personal residence. Donald transferred other property to Marla, but the fair market value of the property was $600,000 less than the fair market value of the property Marla had transferred to him. To make the settlement equal, Donald agreed to pay Marla $600,000, payable over 10 years at 8% interest. For several years, Donald deducted the interest on his Federal income tax return as investment interest. Upon audit, the IRS disallowed the interest deduction, classifying it as nondeductible personal interest. Donald believes the interest is deductible and has asked you to find support for the deduction. Write a letter indicating your findings to Donald Jansen, 104 South Fourth Street, Dalton, GA 30720. Partial list of research aids: U.S. v. Gilmore, 63–1 USTC ¶9285, 11 AFTR 2d 758, 83 S.Ct. 623 (USSC, 1963). John L. Seymour, 109 T.C. 279 (1997). Note: Solutions to Research Problems can be prepared by using the Checkpoint® Student Edition online research product, which is available to accompany this text. It is also possible to prepare solutions to the Research Problems by using tax research materials found in a standard tax library. Communications 10-46 PART 3 Deductions    

Research Problem 2. Ken and Mary Jane Blough, your neighbors, have asked you for advice after receiving correspondence in the mail from the IRS. You learn that the IRS is asking for documentation in support of the itemized deductions the Bloughs claimed on a recent tax return. The Bloughs tell you that their income in the year of question was $75,000. Because their record-keeping habits are poor, they felt justified in claiming itemized deductions equal to the amounts that represent the average claimed by other taxpayers in their income bracket. These averages are calculated and reported by the IRS annually based on actual returns filed in an earlier year. Accordingly, they claimed medical expenses of $7,102, taxes of $6,050, interest of $10,659, and charitable contributions of $2,693. What advice do you give the Boughs? Partial list of research aids: Cheryl L. de Werff, T.C. Summary Opinion, 2011–29.

Research Problem 3. In January, Ron, a firefighter, was injured in the line of duty as a result of interference by a homeowner. He incurred medical expenses of $6,500 related to his injuries. Ron sued the homeowner and was awarded damages of $26,500 in December. The court indicated that $6,500 of the award was for payment of Ron’s medical expenses and $20,000 was for punitive damages. Ron has prepared his income tax return for the year and has asked you to review it. You notice that Ron has not reported any part of the award as income and has included the medical expenses in computing his itemized deductions. Write a brief memorandum for the tax files that summarizes the advice you should give Ron.

Research Problem 4. Tom and Mary Smith, whose son was found murdered in a parking garage, offered a $100,000 reward for the city police to use to obtain information leading to the arrest and conviction of the murderer. As a result of the reward, a person who had overheard the murderer telling a friend about the crime reported the conversation to the police. The murderer was arrested and convicted, and the Smiths contributed the money to the police department, which gave the reward to the informant. Can the Smiths treat the payment as an itemized deduction? Explain.

Research Problem 5. Marcia, a shareholder in a corporation with stores in five states, donated stock with a basis of $10,000 to a qualified charitable organization in 2011. Although the stock of the corporation was not traded on a public stock exchange, many shares had been sold over the past several years. Based on the average selling price for the stock in 2011, Marcia deducted $95,000 on her 2011 tax return. Marcia received a notice from the IRS that the $95,000 deduction had been reduced to $10,000 because she had not obtained a qualified appraisal or attached a summary of her appraisal to her tax return. Marcia has asked you to advise her on this matter. Write a letter containing your conclusions to Ms. Marcia Meyer, 1311 Santos Court, San Bruno, CA 94066. Partial list of research aids: Reg. § 1.170A–13(c)(2).

Research Problem 6. Recent tax reform discussions have involved proposals that would broaden the income tax base and reduce the tax rate. Other discussions have focused primarily on modifying the tax law so that only the most affluent Americans would pay more taxes, either as a result of broadening the tax base or raising tax rates. Broadening the tax base can involve subjecting more types of income to taxation and/or eliminating or reducing tax deductions. Locate at least two tax reform proposals that are currently being debated where itemized deduction provisions would be modified. In an e-mail to your professor, evaluate each of the proposals in terms of costs and benefits and compare them to current law.

Research Problem 7. Search the Internet for stories about major charitable contributions by individuals, including Bill Gates, Warren Buffett, Barack Obama, and at least one other individual. Briefly discuss any tax issues that are related to the contributions.