INDIVIDUAL TAX RETURN PROBLEM

1. John K. and Susan L. Carter are married and file a joint return. John is self-employed as a financial consultant, and Susan is a flight attendant. John and Susan have two dependent children (Mary P., Alex R.). The children live at home with John and Susan for the entire year. John and Susan provided 100% of support for both children.

The Carters provide you with the following additional information:

The Carters do not want to contribute to the presidential election campaign.

The Carters live at 3701 Brighton Avenue, Unit 101, Santa Monica, California 90018.

John's birthday is 11/5/1969 and his Social Security number is 555-44-5766.

Susan's birthday is 5/12/1972 and her Social Security number is 555-77-1258.

Mary's birthday is 11/6/2003 and her Social Security number is 555-18-7592.

Alex's birthday is 2/1/2005 and his Social Security number is 555-92-8751.

The Carters do not have any foreign bank accounts or trusts.

John and Susans contact phone is 555-334-3235

2. Susan is a financial analyst for Home Decor, Inc. Home Dcors Employer ID is 55-5552234 (box b W-2) and the companys address is 2459 Beach Place, Venice Beach, CA, 90291.

a. Susan earned $87,000 in salary from Home Decor. Home Dcor withheld taxes from her salary as follows, correctly reported on her W-2.

Federal income tax of $8,474

California income tax of $5,800 (state ID 55-5552234)

Santa Monica city income tax of $675

Social Security tax of $5,438

Medicare tax of $1,088

b. Wages, Social Security wages, Medicare wages and local wages, were correctly reported on Susans W-2 as $87,000.

c. Susan contributed $14,000 in elective deferrals to her 401(k) plan with Home Dcor, Inc. (Box 12D, W-2).

d. For Box 13, W-2, Susan has no items checked.

3. John and Susan received $2,300 of interest from a joint account at First Savings Bank, reported on Form 1099-INT. They also received qualified dividends of $3,800 on jointly owned stock in Glaco Corporation and $1,900 on jointly owned stock in Metalinc Corporation, reported on Form 1099-DIV.

4. John's has a full-time real estate business named Solutions Consulting, providing real estate consulting services to a large local real estate group (Business Code 531390)., Maximum Force Realty, Inc. (Federal Tax ID: 55-3099922). Johns consulting business is organized as a sole proprietorship (John will report revenues and expenses on Schedule C). Johns business is located at 645 Grove Street, Suite 1134, Santa Monica, California 90018. The employer identification number is 93-3488888. John's gross receipts during the year were $330,000, all reported on Form 1099-MISC, Box 4 (Nonemployee compensation), and all received from Maximum Force Realty. John uses the cash method of accounting for his business.

5. John's business expenses (considered ordinary, necessary, and reasonable) were as follows:

Advertising	$ 5,000
Communication expenses (phone, cell phone, etc.)	3,800
Professional dues	1,800
Business insurance	1,900
Payments to independent contractors (reported on Form 1099)	48,000
Insurance on office contents	1,120
Lease expense (equipment and furniture rental)	5,200
Accounting and legal services	4,100
Miscellaneous office expense (cleaning, etc.)	3,200
Utilities and telephone	3,360
Office rent	7,400
Meals and entertainment[1] (50% category)	14,000
Business travel	8,700
Supplies	1,900
Business license fees	700

John leases his business equipment and furniture and has no depreciation expense. During 2016, Johns business mileage for his 2017 Nissan Xterra (SUV under 6,000 lbs) was 15,000 (his total mileage was 28,000, personal miles were 9,000 miles and commuting miles were 4,000).. He started using this vehicle on 1/1/17. The vehicle is available for personal use in addition to his Toyota Camry (driven primarily by Susan). John elects to claim the standard mileage deduction. In addition to the mileage deduction, John paid work-related tolls of $450 and work-related parking fees of $250.

In addition to the above items, John spent $20,000 to promote his business with a party at a Santa Barbara beach resort in September. The party included meals and drinks ($14,000), facility rental ($1,000), and various marketing materials (including small gifts) ($5,000), provided to guests. The principal purpose of the party was to promote goodwill and relations with existing clients. John discussed various business items with each client or potential client in attendance during the party. John would like to fully deduct this cost if possible. John retained the flyer advertising the party, receipts, guest list, and a brief analysis of the purpose of the meeting and results.

6. The Carters sold the following investments during 2017. The two stock sales were properly reported by their brokerage firm E-Trade, Account # 34-3399488) on Form 1099-B.

4/3/17: 500 shares of Glaco Corporation common stock for $70 per share (minus a $1,000 total commission). The shares were purchased on 11/1/14 for $30 per share.

6/23/17: 1000 shares of Metalinc Corporation common stock for $100 per share (minus a $3,000 total commission). The shares were purchased on 4/1/16 for $110 per share.

10/11/17: 1000 shares of Symbex, Inc. common stock for $30 per share (minus a $1000 total commission). The shares were purchased on 8/2/17 for $25 per share.

11/1/17: Abstract art creation (by a local artist) for $53,000. Susan had purchased the art for $20,000 on September 1, 2013.

The Carters had a $2,000 long-term capital loss carryover from sales of stock in prior tax years. The same amount applies for the regular tax and AMT.

7. The Carters filed their 2016 federal, state, and local returns on April 13, 2017. They paid the following additional 2016 taxes with their returns: federal income taxes of $1,630, state income taxes of $650 (reported on Form 1099-G in 2017), and city income taxes of $190.

8. In addition to the taxes withheld by Susans employer, John Carter also made timely estimated payments of $20,000 each quarter for federal income taxes and $9,000 per quarter for the self-employment tax. The Carters also made estimated state income tax payments of $2,000 each quarter and estimated city income tax payments of $300 each quarter. The Carters made all fourth-quarter payments on December 31, 2017. They would like to receive a refund for any overpayments.

9. John and Clair have qualifying insurance for purposes of the Affordable Care Act (ACA) under Susans health care plan at Home Dcor, Inc.

10. John and Susan rent a three-bedroom condo in Santa Monica.1

11. On a gambling trip to Las Vegas on June 8 2017, John won $5,000 betting on a horse race (second race, Belmont), paid by Cashier 6, Window 11. His related gambling losses were $2,000. The winnings were properly reported on Form W-2G by Harrahs Casino (3475 S Las Vegas Blvd, Las Vegas, NV 89109), Federal Tax ID No. 55-3344334, Telephone No. 555-333-5533. No taxes were withheld by Harrahs. IDs presented were voter registration (234499) and DL (99459999).

12. Other expense related information obtained from the Carters is listed below.

a. The Carters paid no job related expenses in 2016.

b. John and Susan contributed $5,000 cash to the American Cancer Society. They had no charitable contribution carryovers from prior tax years.

c. The Carters unreimbursed medical expenses in 2016 were $3,200.

d. The Carters had zero education expenses in 2016 and paid no student loan interest.

e. Car registration fees paid in 2016 were $1,900. (2016 Toyota Camry, $700; 2017 Nissan Xterra $1200).

Required

A. Use the provided information to complete John and Susan Carter's 2017 federal income tax return. If information is missing, use reasonable assumptions to fill in the gaps. Ignore the alternative minimum tax for this problem.

The forms required for this problem include:

Form 1040

Schedule B (interest and dividends)

Schedule C (Johns business)

Schedule D (capital gains and losses)

Schedule SE (Johns self-employment tax)

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

B. Prepare a 1-2 page research memorandum to determine if the $20,000 of expenses related to the party for Johns business are deductible expenses as ordinary, necessary, and reasonable, or must be capitalized as goodwill. For this memorandum, include on a separate attachment, and use the following structure.

Research Memorandum

Client Name

Facts (briefly restate important facts)

Tax Issue (identify the principal issue and sub-issues to be researched)

Research Authority (locate relevant authority from the Internal Revenue Code, IRS regulations, and any court decision that you deem important.

Analysis (analyze the facts with the authority)

Conclusion (from your analysis, determine if the costs are deductible or not)

This assignment may be completed in groups of two if desired. Each group will turn in one return and one memorandum.

[1] Before the 50% limitation.

11. On a gambling trip to Las Vegas on June 8 2017, John won $5,000 betting on a horse race (second race, Belmont), paid by Cashier 6, Window 11. His related gambling losses were $2,000. The winnings were properly reported on Form W-2G by Harrahs Casino (3475 S Las Vegas Blvd, Las Vegas, NV 89109), Federal Tax ID No. 55-3344334, Telephone No. 555-333-5533. No taxes were withheld by Harrahs. IDs presented were voter registration (234499) and DL (99459999).

12. Other expense related information obtained from the Carters is listed below.

a. The Carters paid no job related expenses in 2016.

b. John and Susan contributed $5,000 cash to the American Cancer Society. They had no charitable contribution carryovers from prior tax years.

c. The Carters unreimbursed medical expenses in 2016 were $3,200.

d. The Carters had zero education expenses in 2016 and paid no student loan interest.

e. Car registration fees paid in 2016 were $1,900. (2016 Toyota Camry, $700; 2017 Nissan Xterra $1200).

Required

A. Use the provided information to complete John and Susan Carter's 2017 federal income tax return. If information is missing, use reasonable assumptions to fill in the gaps. Ignore the alternative minimum tax for this problem.

The forms required for this problem include:

Form 1040

Schedule B (interest and dividends)

Schedule C (Johns business)

Schedule D (capital gains and losses)

Schedule SE (Johns self-employment tax)

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

B. Prepare a 1-2 page research memorandum to determine if the $20,000 of expenses related to the party for Johns business are deductible expenses as ordinary, necessary, and reasonable, or must be capitalized as goodwill. For this memorandum, include on a separate attachment, and use the following structure.

Research Memorandum

Client Name

Facts (briefly restate important facts)

Tax Issue (identify the principal issue and sub-issues to be researched)

Research Authority (locate relevant authority from the Internal Revenue Code, IRS regulations, and any court decision that you deem important.

Analysis (analyze the facts with the authority)

Conclusion (from your analysis, determine if the costs are deductible or not)

This assignment may be completed in groups of two if desired. Each group will turn in one return and one memorandum.