FORM 1040

Andrew (Andy) S. and Sarah H. Clark are husband and wife and live at 4112 Foxglove Drive, McKinney, TX 75070. Andy is a retired petroleum engineer, and Sarah is a portrait artist. They choose to file a joint tax return.

Their daughter, Gabrielle, was given custody of her children in a November 2019 divorce and awarded child support of $1,000 a month. The decree does not indicate who is entitled to the dependency exemptions for the children. Following the divorce, Gabrielle is taking some time to decide how to move forward with her life. She did not work in 2021, so she has no income for the year except the money she received for child support. Andy and Sarah have provided all Gabrielles and the twins support beyond child support.

Name Social Security Number Birth Date AGE

Andrew S. Clark 123-45-6785 09/15/1947 2022-1947 = 75 yrs.

Sarah H. Clark 123-45-6786 12/03/1952 2022-1952 = 70 yrs.

Gabrielle Sparks 123-45-6784 10/19/1985 2022-1985 = 37 yrs.

Malone Sparks 123-45-6787 06/25/2012 20222012 = 10 yrs.

Macie Sparks 123-45-6788 06/25/2012

When he retired at age 65, Andy was chief of offshore operations at Pelican Exploration Corporation. While employed, Andy participated in Pelicans contributory qualified pension plan, to which he had contributed $250,000 (in after-tax dollars). Under one of the plan options, he chose a life-annuity payout of $60,000 per year over his life. As part of his retirement package, Andy also received nontaxable health insurance coverage.

Besides the items already mentioned, the Clarks had the following cash receipts in 2022.

Social Security benefits (Andy, $12,000; Sarah, $6,000) * 85% = Gross Taxable Income

Life insurance proceeds $50,000. The life insurance proceeds concerned a policy owned by Maximilian Clark, which named Andy as sole beneficiary. The receipt of the proceeds came as a complete surprise to Andy.

Qualified dividend income (reported on separate Forms 1099DIV):

• Ragusa Corporation 1,200
• Pelican Power 400
• IBM bonds 600
• CD at First National Bank of McKinney 400
• Wells Fargo money market fund 300
• City of Beaumont (TX) general-purpose bonds 9,000

1. Due to Andys expertise in Gulf of Mexico offshore operations, Pelican continues to use his services on a consulting basis. Consulting income paid by Pelican (including expense reimbursement) $35,000.

After each trip, Andy recovers his expenses when he is paid by Pelican for the services rendered. During 2021, he made seven trips on behalf of Pelican. On a typical trip, Andy flies by commercial airline to New Orleans, Houston, or Corpus Christi, and then takes a company helicopter to the offshore platform. The expenses for these trips are as follows:

• Airfare $ 5,100
• Lodging 3,100
• Meals 2,200
• Ground trans. 750

Total $11,150

2) Sarah, an accomplished artist, is well known regionally for oil portraits. She paints in the Photorealism style, providing her clients with portraits that are often mistaken for photographs. Painting in this style is very time-consuming. Consequently, her output averages between 15 and 16 portraits a year. Her fee of $4,000 per portrait was set several years ago and never varies. As this is quite reasonable for a Photorealistic oil portrait, she has a long waiting list of clients who have not yet been scheduled for sittings.

She does all the work in the studio the Clarks maintain in their personal residence. Sarah is a cash basis taxpayer with respect to her art business.

• One portrait was delivered in mid-2021 to the CEO of a company who promised payment within 30 days. Payment was never received, and the company has since entered bankruptcy. Since the CEO has been indicted for securities fraud, Sarah feels certain that she will never be paid for the portrait.
• The final 2 portraits were delivered in late 2021, and payments for both were received in early 2022.
• Also, in December 2021, Sarah accepted $4,000 as payment for a portrait to be done in 2022.

Her total cost for painting supplies in 2022 was $3,010

Sarah prefers to work at home. One-fourth of the 4,000 square-foot living area is devoted to Sarahs studio. The Clarks built the home at a cost of $350,000 on a lot previously acquired for $100,000, and they moved in on June 15, 2015. As to business use, depreciation is based on MACRS (using the midmonth convention) applicable to 39-year nonresidential realty

Besides home mortgage interest - $2,200 and property taxes - $3,600, other residence-related expenses were:

• Utilities $ 4,200
• Cleaning service 2,800
• Home security 1,600
• Home insurance 970
• Stain removal - studio floor 1,100
• Repairs to studio skylight 340

Other taxpayer payments made for 2022 expenditures not already mentioned are as follows:

• Gabrielles legal fees and court costs incident to her divorce $9,000
• Medicare B insurance premiums for Andy and Sarah $2,244
• Health care premiums for dependents $3,600
• Dental implants for Sarah $8,000
• Cash donations to New Samaria Baptist Church, McKinney, TX $1,200
• Subscriptions to professional journals, Oil and gas related (Andy) $160 and Art related (Sarah) $120
• Dues to professional organizations (Andy) $140 and the State professional license fee (Andy) $250
• 2021 tax return preparation fees paid in 2022 ($200 for Andys business, $250 for Sarahs business, and $450 for their personal income tax return) $900.

1. December 2021, Sarah was hit by an out-of-control delivery truck. Under the terms of the settlement, Sarah would receive $134,000, which was $126,000 for personal injury and $8,000 for loss of income because her injuries prevented her from painting for a period of weeks. On January 31, 2022, Sarah signed the release and was immediately paid $134,000.

1. In August 2022, Andy was rear-ended while stopped for a red light. As a result, Andy was subject to the $1,000 deductible provision in the policy, which he paid with respect to his car repairs in 2022. The Clarks claimed no deductions with respect to the accident on their 2021 income tax return. In late 2022, the insurance company located the driver at fault and recovered the amount paid for repairs. Consequently, in 2022. Andy received a check refunding the $1,000 he paid for his policys deductible.

At a mortgage foreclosure auction held on February 4, 2005, Andy acquired an abandoned sugarcane farm known as LaBeaux Place for $30,000. In view of the expansion trend in nearby Houston, he regarded the purchase as a good investment. Early in 2021, Andy was contacted by a Houston real estate developer who offered $250,000. Considering the prospect of a large taxable gain, Andy arranged for a property swap. In exchange for several vacant lots on Padre Island (TX) worth $240,000 and cash of $10,000, Andy transferred LaBeaux Place to the developer. The exchange took place on June 20, 2021.

Andy purchased unimproved land near Beaumont (TX) for $18,200 at an auction held on April 17, 1992. The property was adjacent to a prison rice farm owned by the Texas Department of Corrections (TDC). Andy bought the property based on a hunch that TDC might someday wish to expand.

In late 2020, the TDC offered $160,000. Andy countered with a selling price of $225,000. Andy and TDC could not come to a mutually agreeable selling price. The TDC then threatened to condemn the property. So, Andy transferred the property to TDC on June 28, 2021, for $180,000. On December 17, 2021, Andy reinvested $175,000 in vacant land located near Texas University. Andy spent the remaining $5,000 on a vacation in 2021.

On May 9, 2013, Uncle Maximilian Clark gifted Andy a gun collection. The collection had an adjusted basis to Maximilian of $4,200 and was worth $13,000 on the date of the gift. After Maximilian died in early 2021, Andy donated the collection to the Alamo Foundation. The transfer was made on December 5, 2021. At that time, the collection was appraised at $16,000. The museum added the guns to its extensive collection of firearms.

On May 9, 2000, Andys father gave him 400 shares of Ragusa Corporation common stock as a birthday gift. The stock cost his father $16,000 ($40 a share) and was worth $20,000 on the date of the gift. In 2012, when the stock was worth $140 per share, Ragusa declared a 2-for-1 stock split. On July 27, 2021, Andy sold 400 shares for $20,000 ($50 a share). Andy kept the remaining 400 shares. Form 1099B did not report the basis of this property.

On December 21, 2021, the Clarks sold 500 shares of Cormorant Power common stock for $40,000 ($80 a share). They purchased the stock on February 1, 2021, for $50,000 ($100 a share). The Clarks sold the stock to generate a loss to offset some of their capital gains.

The Clarks have a long-term capital loss carryover of $7,000 from 2020.

The Clarks had always thought that taking extended road trips in an RV would be fun. So, in June 2018, they bought a new Winnebago Deluxe Coach RV for $106,250 [$100,000 (discounted list price) + $6,250 (state sales tax)]. However, it only took Andy and Sarah two weeks on the road to determine that this method of traveling the continental United States was not for them. In August 2021, they sold the RV to a neighbor for $90,000. The neighbor paid $20,000 down and paid the balance of $70,000 in early December 2022. Andy did not charge his neighbor with any interest.

Texas does not impose an income tax, so the Clarks choose the state and local sales tax option. In addition to the state general sales tax, the local sales tax rate is 2% (1% city, 1% community development). They do not keep track of sales tax expenditures for routine purchases (e.g., clothes, prepared foods) but can verify the sales tax on exceptional items (i.e., big-ticket purchases like the RV).

Besides home mortgage interest - $2,200 and property taxes of $3,600, other residence-related expenses were:

• Utilities $ 4,200
• Cleaning service 2,800
• Home security 1,600
• Home insurance 970
• Stain removal - studio floor 1,100
• Repairs to studio skylight 340

Payments made for various 2021 expenditures were:

• Gabrielles legal fees and court costs incident to her divorce $9,000
• Medicare B insurance premiums for Andy and Sarah $2,244
• Health care premiums for dependents $3,600
• Dental implants for Sarah $8,000
• Cash donations to New Samaria Baptist Church, McKinney, TX $1,200
• Subscriptions to professional journals, Oil and gas related (Andy) $160 and Art related (Sarah) $120
• Dues to professional organizations (Andy) $140 and the State professional license fee (Andy) $250
• 2021 tax return preparation fees paid in 2022 ($200 for Andys business, $250 for Sarahs business, and $450 for their personal income tax return) $900.

The Clarks made quarterly Federal income tax payments of $2,400 on each of the following dates: April 10, 2021; June 11, 2021; September 10, 2021; and December 28, 2021. Last years Federal income tax return reflected an overpayment of $800 tax, which the Clarks chose to apply to their 2021 income tax liability.

The trustee of Andys retirement plan also withheld $6,500 of tax with respect to his retirement withdrawals for the year. Neither Andy nor Sarah holds any foreign financial accounts