Individual Tax Return Problem 6

Individual Tax Return Problem 6

Appendix C C-9

1. The Gonzaleses sold 200 shares of Capp Corporation stock on September 3, 2017, for $42 a share (minus a $50 commission). The Gonzaleses received the stock from Armando’s father on June 25, 1981, as a wedding present. Armando’s father originally purchased the stock for $10 per share on January 1, 1969. The stock was valued at $14.50 per share on the date of the gift. No gift tax was paid on the gift.
2. Armando and Lourdes have given you a file containing the following receipts for expenditures during the year:

Prescription medicine and drugs (net of insurance reimbursement) $ 376 Doctor and hospital bills (net of insurance reimbursement) 2,468 Penalty for underpayment of last year’s state income tax 15 Real estate taxes on personal residence 4,762 Interest on home mortgage (paid to Home State Savings & Loan) 8,250 Interest on credit cards (consumer purchases) 595 Cash contribution to St. Matthew’s church 3,080 Payroll deductions for Lourdes’s contributions to the United Way 150

1. The Gonzaleses filed their 2016 federal, state, and local returns on April 12, 2017. They paid the following additional 2016 taxes with their returns: federal income taxes of $630, state income taxes of $250, and city income taxes of $75.
2. The Gonzaleses made timely estimated federal income tax payments of $1,500 each quarter during 2017. They also made estimated state income tax payments of $300 each quarter and estimated city income tax payments of $160 each quarter. The Gonzaleses made all fourth-quarter payments on December 31, 2017. They would like to receive a refund for any overpayments.
3. Armando and Lourdes have qualifying insurance for purposes of the Affordable Care Act (ACA).

INDIVIDUAL TAX RETURN PROBLEM 6 Required:

∙ Use the following information to complete Paige Turner’s 2017 federal income tax return. If any information is missing, use reasonable assumptions to fill in the gaps.

∙ Any required forms, schedules, and instructions can be found at the IRS website (www.irs.gov). The instructions can be helpful in completing the forms.

Facts:

1. Paige Turner is single and has two children from her previous marriage. Ali lives with Paige, and Paige provides more than half of her support. Leif lives with his father, Will (Leif lived with Will for all of 2017). Will provides more than half of Leif’s support. Paige provides you with the following additional information:

∙ She uses the cash method of accounting and a calendar year for reporting. ∙ She wishes to contribute to the presidential election campaign. ∙ Paige lives at 523 Essex Street, Bangor, Maine 04401. ∙ Paige’s birthday is May 31, 1979. ∙ Ali’s birthday is October 5, 2008. ∙ Leif’s birthday is December 1, 2006. ∙ Paige’s Social Security number is 007-XX-4727. ∙ Ali’s Social Security number is 005-XX-7232. ∙ Leif’s Social Security number is 004-XX-3419.

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C-10 Appendix C

∙ Will’s Social Security number is 006-XX-6333. ∙ She does not have any foreign bank accounts or trusts.

1. Paige is employed as a nuclear engineer with Atom Systems Consultants, Inc. (ASCI). ASCI’s federal employer identification number is 79-1234466. Paige’s pay stubs indicate that she had $7,230 withheld in federal taxes, $4,987 in state taxes, $4,495 in Social Security taxes, and $1,051 in Medicare taxes. ASCI has an exten- sive fringe benefits program for its employees.
2. Paige earned salary of $70,000 (before subtracting her 401(k) and flexible spending plan contributions). She contributed $7,000 to her 401(k) account, and she contrib- uted $2,500 to her flexible spending account.
3. ASCI paid $397 of whole life insurance premiums to cover Paige’s personal whole life insurance policy. ASCI also paid health club dues of $900 to a nearby health club on Paige’s behalf.
4. Taking advantage of ASCI’s educational assistance program, during the fall Paige enrolled in two graduate engineering classes at a local college. ASCI paid her tu- ition, fees, and other course-related costs of $2,300.
5. Paige received free parking in the company’s security garage that would normally cost $200 per month.
6. Paige manages the safety program for ASCI. In recognition of her superior handling of three potential crises during the year, Paige was awarded the Employee Safety Award on December 15. The cash award was $500.
7. On January 15, 2017, Paige’s father died. From her father’s estate, she received stock valued at $30,000 (his basis was $12,000) and her father’s house valued at $90,000 (his basis in the house was $55,000).
8. Paige owns several other investments and in February 2018 received a statement from her brokerage firm reporting the interest and dividends earned on the invest- ments for 2017. (See Exhibit A.)

EXHIBIT A Forms 1099 and 1098 This is important tax information and is being furnished to the Internal Revenue Service.

1099-Div Dividends & Distributions

Entity Description Amount

General Dynamics Gross qualified dividends $300

1099-Int Interest

Entity Description Amount

New Jersey Economic Development bonds Gross interest $300 IBM bonds Gross interest 700 State of Nebraska bonds Gross interest 700

1098-Mortgage Interest Statement

Entity Description Amount

Sunbelt Credit Union Mortgage interest $7,100 Northeast Bank Home-equity loan interest 435

Grubstake Mining & Development: preliminary report (preliminary K-1) to Paige for the 2017 tax year:

Distribution to shareholder $1,000 Ordinary income (1% of $200,000) 2,000

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Appendix C C-11

1. In addition to the investments discussed above, Paige owns 1,000 shares of Grubstake Mining & Development common stock. Grubstake is organized as an S corporation and has 100,000 shares outstanding (S corp. ID number 45-4567890). Grubstake reported taxable income of $200,000 and paid a distribution of $1.00 per share during the current year. Paige tells you that Grubstake typically does not send out its K-1 reports until late April. However, its preliminary report has been consis- tent with the K-1 for many years. (See Exhibit A.) Paige does not materially partici- pate in Grubstake’s activities.
2. Paige slipped on a wet spot in front of a computer store last July. She broke her ankle and was unable to work for two weeks. She incurred $1,300 in medical costs, all of which were paid by the owner of the store. The store also gave her $1,000 for pain and suffering resulting from the injury. ASCI continued to pay her salary during the two weeks she missed because of the accident. ASCI’s plan also paid her $1,200 in disability pay for the time she was unable to work. Under this plan ASCI pays the premiums for the disability insurance as a taxable fringe benefit.
3. Paige received a Form 1099-B from her broker for the sale of the following securi- ties during 2017. The adjusted basis amounts were reported to the IRS.

Sales Purchase Sales Commission Her Security Date Date Price Paid on Sale Basis

Nebraska state bonds 03/14/17 10/22/11 $2,300 $160 $1,890 Cassill Corp (500 shares) 10/20/17 02/19/16 8,500 425 9,760

1. In addition to the taxes withheld from her salary, Paige also made timely estimated federal tax payments of $175 per quarter and timely estimated state income tax pay- ments of $150 for the first three quarters. The $150 fourth-quarter state payment was made on December 28, 2017. Paige would like to receive a refund for any overpayment.
2. Because of her busy work schedule, Paige was unable to provide her accountant with the tax documents necessary for filing her 2016 state and federal income tax returns by the due date (April 15, 2017). In filing her extension on April 15, 2017 she made a federal tax payment of $750. Her return was eventually filed on June 25, 2017. In August 2017, she received a federal refund of $180 and a state tax refund of $60. Her itemized deductions for 2016 were $12,430.
3. Paige found a renter for her father’s house on August 1. The monthly rent is $400, and the lease agreement is for one year. The lease requires the tenant to pay the first and last months’ rent and a $400 security deposit. The security deposit is to be re- turned at the end of the lease if the property is in good condition. On August 1, Paige received $1,200 from the tenant per the terms of the lease agreement. In November, the plumbing froze and several pipes burst. The tenant had the repairs made and paid the $300 bill. In December, he reduced his rental payment to $100 to compensate for the plumbing repairs. Paige provides you with the following additional information for the rental in 2017:

Property taxes $770 Other maintenance expenses 285 Insurance expense 495 Management fee 350 Depreciation (to be computed) ?

The rental property is located at 35 Harvest Street, Orono, Maine 04473. Local practice is to allocate 12 percent of the fair market value of the property to the land. (See item #8.) Paige makes all decisions with respect to the property.

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C-12 Appendix C

1. Paige paid $2,050 in real estate taxes on her principal residence. The real estate tax is used to pay for town schools and other municipal services.
2. Paige drives a 2015 Acura TL. Her car registration fee (based on the car year) is $50 and covers the period 1/1/17 through 12/31/17. In addition, she paid $280 in prop- erty tax to the state based on the book value of the car.
3. In addition to the medical costs presented in item #11, Paige incurred the following unreimbursed medical costs:

Dentist $ 310 Doctor 390 Prescription drugs 215 Over-the-counter drugs 140 Optometrist 125 Emergency room charges 440 LASIK eye surgery 2,000 Chiropractor 265

1. On March 1, Paige took advantage of low interest rates and refinanced her $75,000 home mortgage with her original lender. Paige purchased the home in 2015. The new home loan is for 15 years. She paid $215 in closing costs and $1,500 in dis- count points (prepaid interest) to obtain the loan. The house is worth $155,000 and Paige’s basis in the house is $90,000. As part of the refinancing arrangement, she also obtained a $10,000 home-equity loan. She used the proceeds from the home- equity loan to reduce the balance due on her credit cards. Paige received several Form 1098 statements from her bank for interest paid by her in 2017. Details appear below. (See also Exhibit A on page C-11.)

Primary home mortgage $7,100 Home-equity loan 435 Credit cards 498 Car loan 390

1. On May 14, 2017, Paige contributed clothing to the Salvation Army. The original cost of the clothing was $740. She has substantiation valuing the donation at $360. The Salvation Army is located at 350 Stone Ridge Road, Bangor, Maine 04401. In addition, she made the following cash contributions and received a statement from each of the following organizations acknowledging her contribution:

Larkin College $850 United Way 125 First Methodist Church 790 Amos House (homeless shelter) 200 Local Chamber of Commerce 100

1. Paige sells real estate in the evening and on weekends (considered an active trade or business). She runs her business from a rental office she shares with several other realtors (692 River Road, Bangor, Maine 04401). The name of her business is Turner Real Estate and the federal identification number is 05-8799561. Her business code is 531210. Paige has been operating in a business-like way since 2006 and has always shown a profit. She had the following income and expenses from her business:

Commissions earned $21,250 Expenses:

Advertising 2,200 Telephone 95 Real estate license 130 Rent 6,000 Utilities 600

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Appendix C C-13

Paige has used her Acura TL in her business since July 1, 2017. During 2017, she properly documented 6,000 business miles (1,000 miles each month). The total mileage on her car (i.e., for both business and personal use) during the year was 15,000 miles (including 200 miles commuting to and from the real estate office). In 2017, Paige elects to use the standard mileage method to calculate her car expenses. She spent $45 on tolls and $135 on parking related to the real estate business.

1. Paige has qualifying insurance for purposes of the Affordable Care Act (ACA).

CORPORATE TAX RETURN PROBLEM 1 Required:

∙ Complete Alvin’s Music Inc.’s (AMI) 2017 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below.

∙ Neither Form 4562 for depreciation nor Form 4797 for the sale of the equipment is required. Include the amount of tax depreciation and the tax gain on the equipment sale given in the problem (or determined from information given in the problem) on the appropriate lines on the first page of Form 1120.

∙ If any information is missing, use reasonable assumptions to fill in the gaps. ∙ The forms, schedules, and instructions can be found at the IRS website

(www.irs.gov). The instructions can be helpful in completing the forms.

Facts: Alvin’s Music Inc. (AMI) was formed in 2008 by Alvin Jones and Theona Smith. Alvin and Theona officially incorporated their store on June 12, 2009. AMI sells (retail) all kinds of music-related products including musical instruments, sheet music, CDs, and DVDs. Alvin owns 60 percent of the outstanding common stock of AMI and Theona owns the remaining 40 percent.

∙ AMI is located at 355 Music Way, East Palo Alto, California 94303. ∙ AMI’s Employer Identification Number is 29-5748859. ∙ AMI’s business activity is retail sales of music-related products. Its business

activity code is 451140. ∙ Officers of the corporation are as follows: ∙ Alvin is the chief executive officer and president (Social Security number

123-45-6789). ∙ Theona is the executive vice president (Social Security number

978-65-4321). ∙ Gwen Givens is the vice president over operations (Social Security number

789-12-3456). ∙ Carlson Bannister is the secretary (Social Security number 321-54-6789). ∙ All officers devote 100 percent of their time to the business and all officers are

U.S. citizens. ∙ Neither Gwen nor Carlson owns any stock in AMI. ∙ AMI uses the accrual method of accounting and has a calendar year-end. ∙ AMI made four equal estimated tax payments of $70,000 each. Its tax liability

last year was $175,000. If it has overpaid its federal tax liability, AMI would like to receive a refund.

∙ AMI paid a dividend of $80,000 to its shareholders on December 1. AMI had sufficent earnings and profits (E&P) to absorb the distribution.

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