For each of the eight (8) question, please include, if applicable, the legal/tax reasoning employed.

1. What is a medical expense for tax purposes? Briefly describe why some taxpayers can deduct the cost of "plastic surgery" and some, for the same procedure, cannot claim a deduction. If taxpayer installs a medically required elevator at a cost of $10,000 - and, as a result, the FMV of the home increases by $3,000, how much is the medical deduction? (15 points)

2. The 1986 Tax Act added two (2) new requirements intended to prevent tax shelter abuses. Briefly describe the two loss limitations and how they operate to limit a taxpayer's ability to claim tax losses. Briefly describe the operation of the three (3) "baskets" used in the second limitation. (15 points)

3. Briefly describe the operation of the "earned income tax credit." How does this credit differ from other, more traditional, tax credits? What additional requirement is imposed on the tax preparer to claim the credit? (10 points)

4. Briefly describe the operation of section 179 and its role in deductions for cost recovery. How does it differ from traditional accounting principles (GAAP)? How does section 179 benefit the taxpayer? (10 points)

5. How are realized and recognized gains different? Briefly describe the operation of section 1031 like-kind exchanges. In connection with section 1031, what function does a "qualified intermediary" (such as an escrow agent) serve? (15 points)

6. Briefly describe the purpose behind the two (2) "depreciation recapture" provisions. When and how does section 1245 operate? When and how does section 1250 operate? (15 points)

7. Gain from the sale of a principle residence is given preferential treatment in our tax code. Briefly describe how section 121 operates to provide the benefit. How is the benefit under section 121 different from the benefit under section 1031? (10 points)

8. Briefly describe the term "holding period" and how it impacts tax computations. What are three (3) different methods for determining a taxpayer's holding period? (10 points)