1. Kerry and Jim have a successful marijuana farm in the woods around Humboldt County, California. Growing marijuana is illegal for federal purposes. Are Kerry and Jim required by law to report the income from their farm on their tax return? Why?

2. Answer the following questions, assuming that the related divorce agreements were executed during 2016.

a.Under a divorce agreement, Joan is required to pay her ex-husband, Bill, $700 a month until their daughter is 18 years of age. At that time, the required payments are reduced to $450 per month.

How much of each $700 payment may be deducted as alimony by Joan? $_______________

How much of each $700 payment must be included in Bills taxable income? $_______________

b. Under the terms of a property settlement executed during 2016, Jane transferred property worth $450,000 to her ex-husband, Tom. The property has a tax basis to Jane of $425,000.

How much taxable gain must be recognized by Jane at the time of the transfer? $_______________

What is the amount of Toms tax basis in the property he received from Jane? $_______________