1 Karl F. and Jeanne S. Wheat are married and live at 13071 Forestview Drive, Columbia, MO 65201. Karl is a self-employed insurance claims adjuster (business activity code 524290), and Jeanne is a dietitian for the local school district. 1. Karl represents several national casualty insurance companies on a contract basis. He is paid a retainer and receives additional compensation if the claims for the year exceed a specified number. As an independent contractor, he is responsible for whatever expenses he incurs. Karl works out of an office near his home. The office is located at 1202 Brentwood Avenue. He shares Suite 326 with a financial consultant, and operating expenses are divided equally between them. The suite has a common waiting room with a receptionist furnished and paid by the landlord. Karls one-half share of the 2011 expenses he paid is listed below. Office rent $11,600 Utilities (includes telephone and fax) 4,300 Replacement of waiting room furniture on April 22 3,600 Renters insurance (covers personal liability, casualty, and theft) 1,400 Office expense (supplies and postage meter) 740 New Toshiba copier (less trade-in on old machine) on February 7 300 Waiting room coffee service (catered) 280 Waiting room magazine subscriptions 90 For his own business use, Karl purchased a laptop computer for $2,100 on June 17 and a Nikon camera for $1,200 on February 5. Except for his vehicle (see item 2), Karl uses the 179 write-offoption whenever possible. 2. On January 2, 2011, Karl paid $31,000 (including sales tax) to purchase a gently used Dodge Durango SUV that he uses 92% of the time for business. No trade-in was involved, and he did not claim any 179 expensing. Karl uses the actual operating cost method to compute his tax deduction, using the 200% declining-balance MACRS depreciation method with a half-year convention. His expenses relating to the Durango for 2011 are as follows: Gasoline $3,100 Auto insurance 1,500 Interest on car loan 820 Auto club dues 225 Oil changes and lubrication 140 License and registration 90 In connection with his business use of the Durango, Karl paid $510 for parking and $350 in fines for traffic violations. In 2011, Karl drove the Durango 14,352 miles for business [8,612 miles between January 1 and June 30 and 5,740 miles between July 1 and December 31] and 1,248 miles for personal use (which includes his daily round-trip commute to work). 3. Karl handles most claim applications locally, but on occasion, he must travel out of town. Expenses in connection with these business trips during 2011 were $930 for lodging and $1,140 for meals. He also paid $610 for business dinners with several visiting executives of insurance companies with whom he does business. Karls other business-related expenses for 2011 are listed below. Contribution to H.R. 10 (Keogh) retirement plan $8,000 Premiums on medical insurance covering family (spouse and children) 4,600 Premiums on disability insurance policy (pays for loss of income in the event Karl is disabled and cannot work) 2,400 State and local occupation fee 450 Birthday gift for receptionist ($25 box of Godiva chocolates plus $3 for gift wrap) 28 4. Jeanne earns $32,000 as a registered dietician for the Columbia School District. The job she holds, manager of the school lunch program, is not classified as full time. Consequently, she is not eligible to participate in the teacher retirement or health insurance programs. Jeannes expenses for 2011 are summarized as follows: Contribution to traditional IRA $4,000 Job hunting expense 720 Continuing education program 350 Membership dues to the National Association of Dietitians 120 Subscription to Nutrition Today 90 To work full-time and earn a larger salary, Jeanne applied for a position as chief dietitian for a chain of nursing homes. According to the director of the recruiting service Jeanne hired, the position has not yet been filled and Jeanne is one of the leading candidates. The continuing education program was sponsored by the National Association of Dietitians and consisted of a one-day seminar on special diets for seniors. Out of a total of 8,670 miles driven for the year, Jeanne drove the family Chevrolet Malibu 930 miles on job-related use. She drove 410 miles between January 1 and June 30 and the remaining 520 miles between July 1 and December 31. The Wheats purchased the car on July 11, 2009, for $23,400. Jeanne uses the automatic mileage method for computing any available deduction for business use of the car. 5. The Wheats have supported Gene Isaacson, Jeannes widowed father, for several years, appropriately claiming him as a dependent for tax purposes. On December 27, 2010, Gene suffered a massive stroke. The doctors did everything they could for Gene, but he died in the intensive care unit of St. Marys Memorial Hospital on January 8, 2011. The Wheats paid the following expenses on behalf of Gene: $11,800 medical ($6,000 incurred in 2010 and $5,800 in 2011) and $5,300 funeral. [The Wheats medical insurance (see item 3) does not cover parents.] These expenses were paid in January and February 2011. Genes will named Jeanne as executor and sole heir of the estate. 6. Upon the advice of the financial consultant who shares office space with Karl, the Wheats decided to convert Genes home into a furnished rental house. After several minor repairs (e.g., touching up the paint on the interior walls, replacing various window screens, and pressure-washing the brick exterior), the property was advertised for rent in the classified section of the local newspaper on March 1, 2011. The repairs cost $720, and the newspaper ad was $360. Based on reconstructed records and appraisal estimates, information about the property is as follows: Original Cost FMV 1/8/11 House $40,000 $220,000 Land 10,000 50,000 Furniture and appliances 21,000 14,000 7. Genes former residence was rented almost immediately, with occupancy commencing April 1, 2011, under the following terms: one-year lease; $2,400 per month; first and last months rent in advance; $2,000 damage deposit; and lawn care, but not utilities, included. The tenant complied with all terms except that the December rent payment was not made until January 1, 2012the tenant took an extended Christmas holiday trip. Expenses in connection with the property were as follows: property taxes, $2,600; repairs, $320; lawn maintenance, $540; insurance, $1,800; and street paving assessment, $2,100. The property is located at 12120 Barrington Avenue, Columbia, MO 65201. (Note: If you are using H&R Block At Home, input 365in the days owned box and in the days rented box. Otherwise, the program will apportion the expenses inappropriately). 8. In early December 2010, a friend advised Karl to buy stock in Pioneer Aviation Inc. (PAI). At that time, PAI was in serious financial straits and was headed toward bankruptcy. Nevertheless, according to Karls friend, the value of the corporations underlying assets was such that the shareholders were bound to recover considerably more than the current market price of $0.50 per share. Excited at the chance for a sure profit, on December 15, 2010, Karl purchased 20,000 shares for $10,000. In September 2011, the trustee in bankruptcy announced that the stock was worthless and that even some of PAIs preferred creditors would not be paid. 9. On June 14, 2011, the Wheats sold 500 shares of Garnet Corporation for $17,500 ($35 per share). They owned 1,000 shares acquired as follows: 500 shares on November 5, 2007, for $25 a share and 500 shares on August 5, 2009, for $30 a share. The Wheats did not instruct their broker as to which 500 shares to sell. 10. One month before she died on April 14, 2002, Violet Isaacson (Jeannes mother) gave Jeanne a coin collection. Based on careful records that Violet kept, the collection had a cost basis of $9,000 and a fair market value of $18,000 at the time Violet passed away. On February 12, 2011, the Wheat residence was burglarized, and the coin collection was stolen. The Wheats filed a claim for $24,000 (the current value of the collection) with the carrier of their homeowners insurance policy. All they were able to collect, however, was $10,000, which was the maximum amount allowed for valuables (e.g., jewelry and antiques) without a special rider. 11. In her will, Violet Isaacson (see item 10) left Jeanne a vacant lot on Joplin Road. Violet had paid $15,000 for the property, and it had a value of $19,000 when she died. Violet had purchased the lot because it was adjacent to a school that she expected would expand. By 2011, it has become clear that the Joplin Road area of Columbia is not growing and that no school expansion will take place. Consequently, on July 1, 2011, Jeanne sold the lot for $19,000. Not included in this price are back property taxes (and interest on the underpaid taxes) of $700 on the lot, which the purchaser assumed and later paid. 12. Every year around Christmas, Karl receives cards from various car repair facilities (including dealerships), expressing thanks for the business referrals and enclosing cash. Karl has no arrangement, contractual or otherwise, that requires any compensation for the referrals he makes. Concerned about the legality of such gifts, Karl had previously consulted an attorney about the matter. Without passing judgment on the status of the payors, the attorney found that Karls acceptance of the payments does not violate state or local law. Karl sincerely believes that the payments he receives have no effect on the referrals he makes. During December 2011, Karl received cards containing $7,200. One card containing $900, however, was delayed in the mail and was not received by Karl until January 4, 2012. 13. In addition to those previously noted, the Wheats receipts during 2011 are summarized below. Payments to Karl for services rendered (as reported on Forms 1099 issued by several payor insurance companies) pursuant to contractual arrangement $82,000 Income tax refunds for tax year 2010 Federal 210 State 90 Interest income State of Missouri general-purpose bonds 1,400 GE corporate bonds 1,100 Certificate of deposit at Columbia National Bank 900 Qualified dividends (Duke Energy) $ 600 Proceeds from garage sale (see item 14) 9,200 Cash gifts from Karls parents 24,000 Karls net state lottery gains (winnings, $1,000; losses, $900) 100 14. On June 2 and 3, 2011, the Wheats held a garage sale to dispose of unwanted furniture, appliances, books, bicycles, clothes, and a boat (including trailer). The estimated basis of the items sold is $25,500. All were personal use property. 15. Expenditures during 2011, not mentioned elsewhere, are as follows: Medical Copayment portion of medical expenses $1,300 Dental (orthodontist) 1,200 Taxes State income tax (see item 17) 3,456 State sales taxes 1,120 Property taxes on personal residence 3,800 Interest on home mortgage reported on Form 1098 4,200 Charitable contributions 3,600 The Wheats medical insurance does not cover dental services. The Wheats pledge contributions of $1,200 per year to their church. In 2011, they paid the pledges for 20102012. During 2011, the Wheats drove the Malibu 270 miles for medical purposes150 miles in the first half of the year and 120 miles in the second half (e.g., trips to the hospital and doctor and dentist offices)and 320 miles for charitable purposes140 miles in the first half of the year and 180 miles in the second half (delivering meals to the poor under a church-sponsored program). 16. The Wheats have two sons who live with them: Trace and Trevor. Both are full-time students. Trace is an accomplished singer and made $4,200 during the year performing at special events (e.g., weddings, anniversaries, and civic functions). Trace deposits his earnings in a savings account intended to help cover future college expenses. 17. The Form W2 Jeanne receives from her employer reflects wages of $32,000. Appropriate amounts for Social Security and Medicare taxes were deducted. Income tax with-holdings were $1,320 for Federal and $1,056 for state. The Wheats made quarterly tax payments of $2,200 for Federal and $600 for state on each of the following dates: April 15, 2011; June 15, 2011; September 15, 2011; and January 15, 2012. Relevant Social Security numbers are provided below. Name Social Security Number Birth Date Karl F. Wheat 111111111 06/06/1969 Jeanne S. Wheat 123456781 08/14/1970 Gene Isaacson 123456784 03/12/1934 Trace Wheat 123456788 09/13/1993 Trevor Wheat 123456789 07/20/1991