Grewal, Basic Federal Income Tax, Fall 2013
Note: This class is not a typical case law course. Although cases are read, most of the lecture is through assignments and the test is 100% from the problems in those assignments. Below are selected problems from those assignments with detailed answers.
Problem Set AA: Calculation of Tax Liability
John and Jane Smith are married. They have no children. John and Jane are both new employees of ACME Corporation, located in City. The Smiths moved to City to begin work at ACME during the most recent taxable year. The Smiths converted their old home to an
Income producing property, and rented it out to a struggling student at Law School. For the most recent taxable year, the Smiths had various items of income and expense, as shown on the table on the next page (expense items are marked in parentheses). Determine the Smiths’ “taxable income” for the most recent taxable year, assuming they file a joint return. Ignore any cost of living, inflation, or other similar adjustments to tax allowed under the code.
Combined Salaries 95,000
Rental Income 5,000
Moving Expenses [amount deductible under §217] (8000)
Medical Expenses [amount deductible under §213] (2,000)
Accountant Fees to Prepare Federal Tax Return [deductible under § 212] (1,000)
Mortgage Interest [deductible under § 163] (6,000)
Expenses Related to Income Property [deductible under § 212] (2,000)
Charitable Contribution to National Public Radio [amount deductible under §170] (500)
Unreimbursed Employee Expenses incurred by Jane, attributable to her trade or business
[deductible under §162] (500)
First calculate their GI: $95,000 (salaries) + $5,000 (rental income) = $100,000–§ 61(a)
Above the Line Deductions under § 62: $8,000 (moving expenses) + $2,000 (income property expenses = $10,000
Regular Itemized Deductions under listed under § 67: $2,000 (medical expenses) + $6,000 (mortgage interest) + $500 (charitable deduction) = $8,500
Miscellaneous Itemized Deductions [not listed] under § 67: $1,000 (attorney fees) + $500 (unreimbursed employee expenses) = $1,500
AGI (§ 62) = $100,000 – $10,000 (ATL deductions) = $90,000
MIDs must exceed 2% of AGI (§ 67): $90,000 * 0.02 = $1800; since $1500 does not exceed $1800 the total amount of MID is $0
Personal Exemption: §151 = $2,000 * 2 = $4,000
Total Income: GI – D (ATL + RID + MID + PE) = $100,000 – $10,000 – $8,500 – $4,000 = $77,500
What if thy decided to take a standard deduction? § 63 (2)(C) = $3,000 *2 = $6,000
TI = AGI – SD – PE = $90,000 – $6,000 – $4,000= $80,000
Problem Set BB: Scope of Gross Income
1. For each of the situations described below, determine whether the tax-payer has gross income:
(a) The taxpayer finds $1000 cash in an envelope behind an old appliance in the taxpayer’s home. Yes this is treasure trove, see Cesarini
(b) The taxpayer purchases a personal residence and finds a valuable painting left behind in the attic. What if, a year later, the artist who created the painting dies, and the painting increases in value by $10,000? No, found painting is not a realization of income since it was purchased with the house. Would not be realized as income until it is sold whether that is from day found or a year later.
(c) The taxpayer is an accomplished artist and creates a painting. He immediately receives an offer to purchase it for $20,000, but he declines the offer, believing that another buyer will offer him more. No, this is imputed wealth. Cannot tax self created property. Would have to sell to realize income.
(d) The taxpayer purchases a piano for $15 at a garage sale, but in fact the piano is a rare collectible worth $10,000. No, cannot be taxed for perceived wealth. If he sold the piano that year he would have a net gain of $10,000 – $15 = $9,985, which would be taxable.
2. On September 8, 1998, Mark McGwire, the first baseman for the St. Louis Cardinals, hit his 62nd home run of the season, surpassing the single season homerun record established by Roger Maris in 1961. The ball was retrieved by Tim Forneris, a 22 year old grounds crewman at Busch Stadium. In a ceremony following the game, Forneris stepped up to the microphone and said, “Mr. McGwire, I have something here that belongs to you.” He then handed the ball to McGwire.
In the days leading up to the game, several sports memorabilia collectors stated that the record breaking ball would likely fetch at least $1 million if sold at auction. For his actions, Forneris received a souvenir Rawlings bat and a 1999 red minivan (with a license plate that read “NO
62”) from his employer. He was presented with a key to his home town of Collinsville, Illinois, a free dinner and souvenir items from the All Star Café in New York City, a free trip to Disney World in Florida, and hundreds of one dollar bills by mail from baseball fans from around the world.
a. Do either McGwire or Forneris have gross income based on these facts? If so, how much? McGwire: probably has GI, but the IRS is not likely to enforce it. Forneris: he has no GI for the ball since as an employee he was obligated to return it. The dinner would not be GI, since this was publicity for the company (see Gotcher). The bat and van though are gifts from the employer specifically and could be arguably compensation and would be GI. Likewise everything else not from the employer could be argued as gifts and not taxed.
b. Suppose Forneris kept the ball and placed it in his dresser drawer, never selling the ball despite firm offers of $1 million for the ball. Does Forneris have gross income? Only if he sold it and realized gain—would be treasure trove.
c. What if Forneris keeps the ball and then it is stolen? He would still be liable for the GI. He would take a deduction however when he filed a return—see Collins
3. Skipper owes Gilligan $2,000 for services Gilligan performed in repairing Skipper’s boat, the S.S. Minnow. Skipper takes Thurston and Lovey (a married couple) out for a three hour tour on the Minnow. Skipper normally charges $2,000 for a three hour boat tour, so he asks Thurston and Lovey to pay the $2,000 to Gilligan (and not to Skipper). The couple does so. Who has gross income under these facts, and how much? Gilligan would have $2,000 from amount paid to him for repairing the boat. Skipper still has $2,000 income which he incurred from the 3-Hour tour transaction—see Old Colony
Problem Set A: Property Transactions
1. George purchased a 10 acre tract of land for $295,000. One acre of the land was developed and is worth $250,000. The other 9 acres are not currently suitable for development and are worth only
a fair market value of exactly $450,000.
(a) What tax consequences to Katie and Patrick on the exchange, i.e., what gain, if any, will each recognize and what basis will each take in the property received in the exchange? Since this was an exchange the basis for both K and P is the FMV = $450,000. Neither will have any gain realized until they actually sell the property
(b) How would your answers to (a) change if, instead of a fair market value of $450,000, Katie's Arizona land had a fair market value of $500,000 and Patrick transferred to Katie his Nevada lake property plus $50,000 in cash in exchange for her land? Katie would be liable for the $50,000. Her basis in the property would be FMV + $50 K = $500,000
(c) Assume the facts of (b) above except that instead of giving Katie $50,000 in cash, Patrick assumed a $50,000 mortgage encumbering Katie's Arizona land. Assume also that, during the following year, Patrick paid $10,000 on the mortgage and then abandoned the idea of building his home in Arizona and sold for $550,000 the land he had received from Katie. The purchaser paid Patrick $510,000 in cash and assumed the $40,000 balance that was then owing on the mortgage encumbering the land. What tax consequences to Patrick on the sale of the Arizona land? Patrick would have a basis of $500,000 in the land. Patrick’s gain was $510,000 – $500,000 = $10,000.
Problem Set B: Gifts & Bequests
1. Carol is one of two legal assistants employed by Lucille, a lawyer. The legal assistants work directly with Lucille and two associate lawyers. This year at the annual holiday office party, Carol received substantial cash presents from Lucille, from the two associate lawyers, and from one of Lucille's clients. The other legal assistant, who has not worked there as long as Carol, received cash presents of lesser amounts from Lucille and the two associate lawyers.
(a) Are the cash presents includable in Carol's gross income? § 102(c); Lucille’s gift is for sure included as income; the associates gifts maybe, need more facts—were the gifts detached, disinterested? The fact that one legal assistant got a present that was less in value alludes to the fact that the gifts are performance based and should be income. Same for the client gifts, were they acting in a detached/disinterested purpose (usually taking gifts from clients could be a PR violation)
(b) Assume that Carol not only works for Lucille, but is her daughter. At Christmas, Carol receives a $2000 present from Lucille. Is this includable in Carol’s gross income? No, we can assume that since it was a family Christmas gift it was not for the benefit of the employee—see § 1.102-1(2)